So investors are turning towards the poorly- funded mid-market which has spreads that can generate the necessary returns the large buyout deals cannot. For example, Hermes is focused on more small to mid-cap and niche markets because it needs PE to generate 200 to 300 basis points above public equity to justify its place in the portfolio in terms of illiquidity premium.
“We’ve always taken an overarching macro, top-down perspective in constructing portfolios,” says Moss at Hermes. “However, as private equity markets have become more mature, we think it necessary to be more opportunistic.
“We think it will be increasingly important to focus on private market niches to achieve this premium,” he adds.
NEW WORLD ORDER
Though PE has been the domain of large, well resourced pension funds, there are those who are convinced it has a place in defined contribution (DC) funds, too.
“The barrier is not liquidity, but pricing as you don’t really know the price of an asset until you sell it,” says Giles Payne, an independent trustee and a director of HR Trustees.
“Accessing investments can also be difficult as it tends to be quite chunky, but there is some interesting work being done by providers to make it DC-friendly.”
Though it will be confined to large providers and mastertrusts, providers are looking for more rigorous pricing models, and trying to finding comparitors in private markets to offer more realistic asset prices, says Payne.
BETTER ALTERNATIVES
If you have the appetite and resources for investing in PE, it can offer a premium of 3% or more, which is why it has remained attractive to investors, says Lidén. In fact, he argues, PE is “a superior way to own a company”.
“PE can be more transparent and you also have active ownership, where owners push the management to do what is needed.” He says public companies are increasingly relying on quarterly results and it is underestimated just how much flexibility a CFO has to manage – or manipulate – those results and cites the recent debacle at Tesco.
“Public equity is increasingly taking a short-term view, whereas private equity takes a five-year horizon and this leads to superior management and I’m very optimistic about the industry,” adds Lidén.
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