Hermes: Emerging managers set to drive PE returns

The largest funds will become diversified, low-risk vehicles for large-scale deployments, said partner Elias Korosis at IPEM.

Emerging managers will drive private equity returns in Europe as the largest funds mature, according to Elias Korosis, a partner at Hermes GPE.

Speaking on a panel at the IPEM conference in Cannes on Wednesday, Korosis said that large buyout funds were likely to become vehicles for large-scale deployment while outsized returns would become the preserve of smaller, growth-oriented managers.

“There is going to be a need for a safer, more diversified, low-double-digit return profile [internal rate of return] which I think the large platforms will be very capable of delivering,” he said. “It’s a very different kind of exposure and risk profile that you need if you really want to get a return profile in the 20s.”

This is the product of the industry’s maturation as well as the stronger incentivisation of smaller players from the considerable personal risk they take in branching off by themselves.

“The sharp incentives gets a little dulled in a large organisation and that’s not just financially,” he said. “People are motivated by a wide range of incentives, part of this is making a difference and having a real impact on the organisation you work in. If you work in a large organisation, that’s harder to do.”

Hermes GPE is London-headquartered fund of funds manager with £8 billion ($10.4 billion; €9.2 billion) in assets under management, according to PEI data.

The European market is still shallow with room for growth at both ends of the market, added Richard Hope, managing director in the European fund investment team at Hamilton Lane.

“Private markets account for about 5 percent of the MSCI Europe, on a global basis it’s more [like] 10 percent. We think the European market has a long way to go. We think the concept of buying and selling private companies needs to develop somewhat, but we continue to be attracted.”