Do you think there is still a role for the mega buyout funds?
There probably is but one could question whether what they are doing now should be classified as private equity in the traditional sense of the asset class. Their strategy could represent an extension of the overall equity exposure for a large institutional investor’s portfolio but I see it as less of an alpha-generating play. It is a valid part of the asset class for sure but with forward return expectations lower than those historically generated should it be commanding a 20 percent carried interest premium? Probably not.
Have you increased or decreased your number of GP relationships?
Overall we have slightly reduced the number of relationships because over time we’ve lowered our mega buyout exposure and we have pretty much stopped investing in venture capital. But in terms of the mid-market relationships that we have, they’ll continue to be relatively stable. I think our industry has had a tendency for a re-up to be treated slightly differently than a new fund commitment , but we’ve never taken that approach. And so as a result we have over time probably had a slightly greater portfolio churn than most other LPs and that’s also driven by our co-investing appetite.
What do you make of the trend of LPs seeking more access to co-investments?
It’s an obvious one, as LPs chase more bang for their buck – and lower fees. A co-invest allocation alongside a fund pot can ramp up the returns in a PE program. However, there is a bit of a disconnect I think in that there is currently a relatively limited universe of LPs that are able to consistently co-invest well. We have found on quite a few occasions that a GP will come to us and say ‘We thought we had the equity syndicate sewn up but somebody who we thought was going to provide a $20 million ticket is not going to be there and we need to fill the gap.’ We see quite a few deals like that where LPs have suddenly dropped out because they weren’t appropriately geared up to take on direct investing.
What do the managers you invest with have in common?
Generally most of the managers that we back have some sort of specialisation – sector, geography, operational skills, consolidation skills and so on. We very rarely invest in a generalist who invests in seven or 10 sectors. If we back a manger that is very operationally focused, the next time around we might be looking for a fund who doesn’t have that approach but is just really good at buying at cheap prices. We very much think about how we get the right balance of skill sets because I think there is a time and a place for each of those approaches across the industry.
Delaney Brown is head of the Americas at Hermes GPE.