Friday Letter: Seller beware

Two news stories this week underlined the significance of Doughty Hanson’s decision to follow Kohlberg Kravis Roberts and Apollo Management and float a fund on Euronext, the Dutch stock exchange.  

Critics of such flotations have grumbled that they reek of top-of-the-market opportunism. They say they are smash-and-grab raids which invert the natural order of private equity fundraising.

Instead of expert investors performing costly and time-consuming due diligence, you have inexperienced investors signing up after a whirlwind roadshow and buying on a banker’s recommendation.

Yet the news of Electra Private Equity’s decision to return to full-scale investing, after a seven-year feast of realisations and a limited re-investment programme, suggested a renewed belief in the long-term viability of a quoted private equity vehicle.

Electra can lay claim to being grandfather of all quoted private equity vehicles, listing as it did 30 years ago on the London Stock Exchange.

Separately, SVG Capital’s robust set of six-month numbers ten years after it listed gave evidence of the durability of its model.

Indeed SVG, the largest investor in its part-owner Permira,  took the opportunity of its results to re-state the case for quoted vehicles.

It noted that the UK quoted private equity sector now has combined assets of £8.7 billion (€13 billion; $16.5 billion) and should no longer be regarded as simply a sub-sector of ‘Investment Companies’.

Add to that the $5 billion raised for Kohlberg Kravis Roberts’s KKR Private Equity Investors and the $2 billion for Apollo’s AP Alternative Assets.

SVG’s argument that the industry is witnessing a fundamental shift in the balance of investors is beginning to look like the thin end of a potentially large wedge.

It believes that as global savings markets mature the private equity industry will need to look at alternative markets for funding.

Defined benefit pension schemes, for so long one of the central pillars of traditional private equity fundraising, are in decline and more often closed to new members.

Defined contribution schemes are in the ascendance, while the collective wealth of high net worth individuals represents the fastest growing savings market. Both groups are ill-served by the traditional private equity fund structure of an illiquid ten-year partnership with a just-in-time draw down of capital.

Not to mention the smaller institutional investors that SVG initially set out to serve 10 years ago which want access to the asset class, but cannot afford minimum subscriptions of €20 million.

SVG estimates around a third of its shareholders are individual investors, or high net worth wealth managers representing individuals. This is from a standing start of zero a decade ago. This is surely set to grow as the asset class’s profile rises in the public mind.

In part this will be because the industry’s deals are increasingly visible. It also seems inevitable that more funds will list list and drive interest in the asset class.

But this circle of supply and demand will only be virtuous if the quoted funds’ performance supports it. And there lies the rub with public vehicles. Liquidity can dry up overnight. Caveat vendor.

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