Private equity: the appeal of the real
Investors looking for returns are considering increasing private equity allocations, but need to be reminded that patience is a virtue in this field
Real assets are a particular focus for wealthy investors as we begin 2012.
According to Scorpio Partnership’s HNW Asset Allocator, private equity and real estate are the two alternative asset classes expected to receive increased allocation this year. Almost 20 per cent of CIOs and strategists surveyed at the world’s top investment managers indicated they would be adding to their private equity exposure in the next six months – a sentiment echoed by members of the family office community. Families are looking for access to real managers managing real companies, after years of investing in complex strategies with complicated structures and paying high fees for lacklustre performance.
Given this appetite, Scorpio Partnership and LPEQ (the association for listed private equity investment companies) invited private equity managers and senior members of the wealth management and family office community to get together in London and in Zurich to discuss how well managers (and their clients) weathered the storm last year, and explore the prospects for 2012.
It was agreed that crises have a habit of honing management skills, and this one has been effective in clearing out the managers that piled into the private equity markets in the boom years in the middle of the last decade. Professionalism and experience made the difference in portfolios last year.
GREATER TRANSPARENCY
Investors today expect more transparency, both in the underlying company holdings and also as to how much performance comes from leverage. As transparency improves, end investors are more likely to hold private equity in their portfolios, including through listed vehicles.
Private equity rewards patient capital, and is still a long-term investment even if there is some liquidity offered. This needs to be reinforced with investors, who may still be evaluating the listed private equity vehicles in an equity context, looking for performance over six to 12 month holding periods.
The last year has seen underlying European portfolio companies coping with the currency crisis. Beyond the expected problems thrown up by managing currency exposure, they are also facing the fact that some global companies are shying away from signing contracts with European firms, over fears they will not be able to deliver if the worst-case scenario occurs and the euro collapses. If they can find similar goods and services elsewhere without the currency backdrop, they are voting with their feet.
Even with all of the challenges faced in 2011, client return appetites are seen to be increasing, which means they are reconsidering investment into private equity. Several managers indicated that the negative press regarding Europe might create more opportunity to get deals done in the region. There is less competition as many firms are looking to invest in growth markets in Asia and Latin America.
“Family offices like a bargain, and ideally want access to good deals for tangible, productive assets. In this context, some wealth managers are eyeing listed private equity as a value opportunity in a complex equity environment,” says Ross Butler, head of external affairs at LPEQ.
Good deals will still get done, and those private equity managers that have longer relationships with the banks will find it easier to get funding – getting a new bank to lend you money is next to impossible. Because of these factors, we are likely to see smaller deals, with lower leverage, and higher quality. Investors are looking for managers that can do something, adding performance through operating experience and expertise, rather than though financial engineering.
One of the challenges of investing this year will be to understand where we are in the cycle. The mood is darkened by policy failures on both sides of the Atlantic, and it is difficult to have visibility in the short term. Some managers made the observation that if you look back at previous crises – whether the 1930s or the 1890s – we always come out of them.
As private equity is a longer-term game, those that invest today may look back favourably at this period as they successfully exit deals towards the end of this decade.
Bill Yelverton is executive director at wealth management think-tank Scorpio Partnership
