Author:
Colin Lloyd
Investment Writer/Presenter/Consultant
In the Long Run- Colin Lloyd Consulting
cdlloyd@blueyonder.co.uk

Limited Partners and Trends in Private Equity

The inaugural Opus Connect London event was generously hosted, on Thursday 27th April, by Faegre Baker Daniels, at their offices near St Paul’s Cathedral. There were more than forty attendees who listened to a distinguished line-up of industry experts. Chaired by Blazo Ivanovic of recruitment specialists, Norman Alex.

The Panellists

Silvi Wompa Sinclair, who heads up the Private Equity (PE) practice at Willis Towers Watson, provided an institutional perspective on the current trends in PE. Ted Cominos, of Faegre Baker Daniels, who has more than 20 years’ experience, in the PE business, both as a lawyer and practitioner, described the place PE has within an investment portfolio alongside Real Estate and Fixed Income. Completing the panel, Francois Aguerre, Co-Head of Origination at Coller Capital, a leading player in the PE “secondaries” market, articulated the case for PE in the current environment, but cautioned investors to expect low double digit returns given the low interest rate environment prevalent in developed markets.

The Debate

The panellists covered a number of key issues including the change in investor return expectations, which have fallen as interest rates have declined, but, according to Sinclair, so too has their risk appetite. Sinclair went on to allude to a bifurcation of institutional investors approach; either choosing to invest with the largest players in the industry or focussing on specialists within a specific industry, sector or geography.

Aguerre noted the increased appetite for private debt in response to the collapse in government bond yields, whilst Cominos opined that within the equity space almost all the deals he had encountered were focussed on the technology sector.

The panellists all agreed that LPs are no longer passive investors. They have grown more demanding, especially in relation to the management fees charged on un-invested capital. Aguerre estimated that $1.4trln of PE assets are held in cash, which could amount to $20bln in management fees if fully loaded.

With equity markets entering the ninth year of a bull market, the question of what investors should expect from PE over the near term was inevitable. Sinclair noted that a number of larger investors were bringing PE investment in-house, but at the same time smaller PE specialist managers were winning mandates, whilst larger managers were taking on specialist consultants and industry experts to bridge to gap between scale and specialization. Cominos reminded the audience that, given the fiduciary obligations of many large institutional investors, larger PE managers were still garnering a larger proportion of the new capital which continues to flow into the sector. Aguerre countered that LP’s are still focussed on hiring “talent”. Cominos, concurred, stating that his own analysis showed that newer, smaller managers tended to outperform the behemoths of the industry. Sinclair suggested that, first and foremost, investors were interested in a manager’s track record. Looking ahead, at this late stage in the cycle, Sinclair urged investors to look for managers who had experience in restructuring in order to avoid a disappointingly long wait to glean acceptable returns.

The panellists’ went on to discuss the issues with the large, established General Partners (GP). Sinclair highlighted the importance of succession planning, Aguerre alluded to the importance of deal-flow, pointing out that the average GP would be expected to spend 60% of their time travelling in search of investment opportunities: a punishing schedule for someone in their forties, even more so for a manager in their sixties. Cominos picked up on the question of deal flow, pointing out that pipeline management was the key to delivering sustainable returns over the long-term.

In terms of geographic demand the panel saw growth in the US, a stable environment in Europe and a decline in interest in Asia. Sinclair mentioned that Willis Towers Watson’s clients were focussed on sectors including sustainability, cyber-security and technology.

When asked what they thought would be a significant PE trend over the next five years, Aguerre stated that he was positive about the growth of the industry given the steady pace of global economic growth. Cominos saw the trend towards manager specialization as gathering momentum, whilst Sinclair, noting that the industry was in the process on maturing, compared PE to a “teenager” with the potential to develop good or bad habits as it reaches maturity.