Feature – Private equity The “old normal”
There is, on the face of it, much to recommend the megatrend outlook, mainly because despite the current environment, pri- vate equity is doing well. The value of private equity deals topped $819bn (£724bn) in the first three quarters of 2022, which is higher than any previous annual figure except for the mammoth numbers seen in 2021, according to the latest pri- vate equity report from PitchBook, a data company. Given the many economic and market storms it has had to endure over the past few years, private equity has sailed through some choppy waters. And although the $819bn is behind the 2021 figure – $1.235trn (£1trn)— albeit with a final quarter to go, it does indicate a real private equity boost, and could mean the asset class has, in fact, returned to the “old nor- mal”, is how the report describes it.
In addition, last year the top quartile of private equity manag- ers was far ahead of the public markets, research from man- agement consultant Bain found, with annualised returns exceeding 20%. For alert investors it is worth noting that private equity activity has proven particularly strong in the technology and healthcare industries.
And investors have naturally benefited from holding private stakes in companies. Buyout and venture capital funds were Harvard’s best-performing asset this year. The leading endow- ment’s venture capital holdings gained “high-single digits” for the fiscal year, according to Narv Narvekar, chief executive of Harvard Management Corporation. Conversely, some have missed out. Calpers, the largest public pension plan in the US, has made the extraordinary admission
that its decision to put its private equity programme on hold for 10 years had cost it up to $18bn (£16bn) in missed returns.
Private equity investors mustn’t be naïve or
complacent in thinking their portfolios are insulated from the wider macro-economic forces.
Stephen O’Neill, Nest
Compressing illiquidity Workplace pension scheme Nest is early in the ramp up phase of investing in the asset class, O’Neill says. “We are structurally underweight private equity, which is itself defensive – but also our fund managers are alive to the macro risks and hence are carefully selecting deals to invest in companies which can be resilient in the face of these challenging conditions.” O’Neill reveals that private equity is set to become a somewhat larger portion of Nest’s portfolio in the next three to five years, as this ramp up of its allocation takes place. “We don’t see that the asset class itself will change fundamentally. However, there are various efforts being made to make private equity more accessible, including to defined contribution (DC) pension schemes,” he says. “More money flowing into the asset class could, on the one hand, compress the illiquidity premia available,” he adds. “But, on the other hand, a wider and more engaged investor base should enhance stewardship and ESG standards in the indus- try, which will add value.” Jason Bermont-Penn, director of institutional business at Octo- pus Investments, also identifies opportunities for DC schemes. “Whilst defined benefit schemes have long embraced private equity – indeed, it is one of the most established asset classes within private markets and its maturity has led to an institu- tionalised and developed market – this has not yet been taken up by DC schemes.” Therefore, he adds: “Given the substantial need for growth amongst most DC members, and that most DC schemes have limited, if any, private market exposure, adding private equity to DC portfolios could be a good way of improving diversifica- tion and delivering the growth that members need. “As DC schemes increase in size and scale, the concerns around liquidity, operational mechanisms and fees should start to reduce, making an investment into private equity more viable.”
Although on a different note, Harvard’s Narvekar said the endowment was “cautious about forward-looking returns in private portfolios”.
A different picture
This cautious tone gives a small insight into the private equity picture going forward. Marks in the road indicate that for the future for the asset class may not be as rosy as in the past.
An obvious factor for private equity is the favourable financial conditions in which it has prospered, delivering top returns over the past decade and more, driven by constant ultra-low
52 | portfolio institutional | November 2022 | Issue 118
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