The current “uber-liquid” environment, which results in “overloaded” funds, will have a negative impact on the returns that can be expected from private equity, which in turn will drive GPs to lower fees, said Marc St John, investor relations partner at European-headquartered global private equity house CVC Capital Partners.
Speaking on a panel on evolving fund strategies at the BVCA Summit 2016, St John said that following the global financial crisis there was a diminishing in the number of GPs that could manage LPs’ capital, and then an “explosion” of capital that needed to be managed.
“That dichotomy created things like the Strategic Opportunities Fund,” St John said, referring to CVC’s longer-term investment vehicle which targets mid-teens returns and expects to hold business for between eight and 12 years.
“An investor comes to us and says ‘look, I’ve got more capital than I know what to do with and I can’t find enough good managers, can you do something with this?’ [The Strategic Opportunities Fund is] over $5 billion in capital and we raised it from five LPs. That gives you a sense of how much capital’s out there,” he said. “We raised the cap twice and we still had people knocking on the door.”
St John said he is often asked whether CVC has “unleashed Frankenstein”, and whether the strategic opportunities strategy is going to “devour” the firm’s other programmes.
“The answer is I don’t know.”
St John said private equity is “a very expensive asset class” and fund managers have to justify that cost “every time we raise a fund with the returns”, adding that if firms are unable to do so then smart investors will take their capital elsewhere.
“If we can’t do that – and as I just said, a lot of the GPs had difficulty with that in the global financial crisis – you’re going to have to lower your prices,” he said.
“My prediction is that obviously the cost has to come down, it’s a very expensive asset class, returns are going to come down over time, but liquidity is going to continue and it’s going to push and find its way into these different strategies.”