Private eye: investigating the changing world of private equity

6 Oct 2015

Private equity has performed exceptionally over the last decade, but the landscape is beginning to shift as investors cut allocations and regulatory change looms. Lynn Strongin Dodds investigates.

Features

Private equity has performed exceptionally over the last decade, but the landscape is beginning to shift as investors cut allocations and regulatory change looms. Lynn Strongin Dodds investigates.

Meanwhile, Hermes was recently awarded a £1bn mandate by its owner, the BT Pension Scheme, to invest in conjunction with buyout firms on specific deals rather than through the industry’s traditional pooled funds. The fund manager, which has £30bn under arrangement, was an early adopter of the model and has built a 15-year $1.8bn co-invest track record with realised returns of 1.8x and 31.3% internal rate of return.

“Private equity firms are fierce competitors,” says Peter Gale, Hermes GPE’s head of private equity and chief investment officer. “Our model is based on partnerships, constructing global portfolios with best-in-region GPs rather than competing with them for deals. It enables us to leverage their experience in doing transactions and due diligence while we focus on building a co-investment portfolio that has the potential to deliver higher risk-adjusted returns and lower costs.”

There can be pitfalls though. As Paul Newsome, Unigestion’s head of private assets, points out: “It makes sense and they can avoid the layer of fees, but it does come with additional risks such as the need to build teams and systems as well as processes to source the most attractive deals. My fear is that there could be some casualties and they could end up with a concentrated portfolio.”

David Curtis, head of UK institutional business at Goldman Sachs Asset Management believes one of the biggest mistakes investors can make is over allocating to the larger funds.

“Portfolios need to be wellconstructed and balanced. This means having a more diversified approach across all sectors so they do not miss out on the opportunities in the small to mid-sized or niche areas.”

Not surprisingly, few have the luxury or clout to forge their own path. It is only the preserve of the biggest institutions that have the deepest pockets to develop in- house expertise and governance, according to Sanjay Mistry, director of private debt at Mercer.

“Smaller funds are still gaining exposure through funds of funds, while there has also been an increase in segregated accounts where investors are making a series of fund commitments. One of the most important issues for all investors is that private equity is a long-term investment and there could be short-term painful periods of performance.”