Feature – Private equity
For asset owners, the challenge now is how to source the right investments, given that private equity has a wide dispersion of returns. Anna Morrison, senior director of private markets at bfinance, highlights that the rapid growth of the market has made it more challenging to source the right strategy. Having been a limited partner (LP) in the past, she argues that periods of high levels of dry powder bring their own challenges. “The biggest issue right now is how you select where to invest, how much you are investing, how carefully you consider your portfolio and the number of managers you need to look at in a particular space is growing and growing,” Morrison adds. “And selecting the wrong manager could come with a heavy price tag. What the performance data tells us is that in private equity, there’s a massive dispersion between bottom quartile and top quartile performance returns. The biggest issue you have, in periods like this, is making sure you are supporting those managers that sit in those top quartiles,” she adds. Law firm Dechert’s 2022 Private Equity outlook describes the market as “scorching hot” and warns that the perks of high lev- els of dry powder could backfire.
“Being heavily armed with capital is a major boon for the global PE industry,” the report reads. “But you can have too much of a good thing. Looking forward to 2022, Covid-19 induced sup- ply chain disruptions and emergent inflationary trends will also need to be considered.”
Different options Buyout funds continue to remain a popular approach for many investors, accounting for 40% of all funds globally while debt and growth funds are also picking up pace, according to Euro- pean Central Bank research published in 2020. Accessing private equity has become easier over the years. “For first time investors, we are seeing two ways of coming to the market,” Morrison says. “There has been quite a shift between what you could do 10 to 15 years ago as a first time investor and what you can do now. “As a first time investor, you want to look at the lower end of the risk scale, but you also want returns. You want to diversify your portfolio, which generally means geographic diversity, vintage diversity and sector diversity as well. For that, one of the most sought after solutions tend to be fund of fund vehicles,” she adds. But she has also seen some of his clients showing more interest in the secondary market. “We have seen that market develop quite significantly in terms of the quality of participants and the amount of money flowing into the market,” Morrison says.
She believes that the secondary market has the potential to address some of the problems of the fund of fund market, par- ticularly because it does not require them to commit their cap- ital for a longer period of time. “With secondaries, you are de-
48 | portfolio institutional | June 2022 | issue 114
Many UK workers, for the first time in their lives, will now have the chance to benefit from investing in private equity.
Mark Fawcett, Nest
ploying your capital a lot faster and over shorter investing periods so you get diversity a lot quicker. You are also seeing a lot quicker path to breakeven costs than you would see in a tra- ditional fund of fund structure,” she says. At the same time, return profiles in secondaries are different. “In a traditional fund of fund model you are looking at a higher multiple and in the secondaries market at a higher IRR. There is also a fee drag in secondaries. You are investing in funds that are often well underway, so the fee load is less,” she adds. The money raised in secondaries tripled in 2020 to $87bn (£71.3bn), but the market is concentrated with $61bn (£50bn) raised by megafunds, McKinsey highlights. Another increasingly popular option for investors are co-in- vestment strategies, which allow investors to deploy capital through a minority investment directly into a company along- side other private equity investors. “Co-investments are featur- ing more and more as part of a fund of fund structure and we are also increasingly seeing the emergence of direct co-invest- ment funds,” Morrison says. “This is interesting for investors who want to get SME exposure but do not necessarily have the in-house skills to do due diligence on their own,” she adds.
Trailblazer With plenty of strategies to choose from, how then are investors allocating to unlisted firms? In the DB world, pools have become a trailblazer in launching private equity funds. They benefit from a combination of scale and a relatively longer investment horizon due to the demographic of their membership, allowing them to make commitments to illiquid investments. Examples include LGPS Central’s 2018/2019 Vintage Fund,
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52
