When Private Equity International caught up with Hermes GPE in 2019, the investment firm was a few years into re-calibrating its investment strategy, shifting its focus from traditional buyouts to growth investing.
Elias Korosis, partner and head of growth investing and strategy at the firm, noted at the time that the growth capital space would grow as large as buyouts within a decade, as technology capital and talent come together in the industry.
In fact, growth equity assets under management have been growing at around twice the rate of buyout assets over the past decade, according to consultancy firm Bain & Co.
In May, Hermes GPE received a $1 billion mandate from the BT Pension Scheme. Half of the capital will be invested in funds, and the other half in co-investments, under the mandate Horizon III. The programme will also have an element of secondaries, according to Korosis.
The European fund of funds manager has done more than 260 co-investments over the past 20 years, investing alongside GPs including Apax Partners SAS and Five Arrows Capital, according to its website. It manages $6.9 billion of assets as of end-March 2022 via separately managed accounts, pooled funds and sidecar vehicles. Target industries include digital, healthcare and sustainable innovation.
PEI caught up with Korosis recently to find out how the firm is deploying capital and rebalancing its portfolio in a period of heightened uncertainty.
How has deployment been in the past 12 to 24 months?
A lot of the activity has been around deploying our growth strategy, which is now almost fully invested. It’s an interesting time to be talking about that because we have seen a shift in the market sentiment. It was high on growth the last couple of years and reached levels of irrational exuberance during covid, which actually made our job as investors harder last year.
It’s a much better time to be a long-term investor in growth equity. We were right on target calling the growth-oriented technology play in the second half of the last decade. It has worked out extremely well. The other themes around healthcare and sustainability have also come through exceptionally strong.
Tech valuations plummeted this year. How are you navigating the downcycle?
We have seen an impact on the listed side, and clearly there is an impact that will naturally come through on broader valuations following public market comps. I’d say that the impact is more backward looking, because actually what it’s doing is reflecting the shift in the sentiment that has [already] happened. It’s not as great in telling you what is likely to happen [in the future].
It’s… a mixed picture. In some parts of the market, the pendulum has swung completely, and maybe what was a selling moment is now a buying moment. We don’t ourselves do a lot of take-privates, but I would see that as a very interesting moment for the large buyout houses. As an investor, you have to be a bit more careful there in terms of looking at liquidity options actively in the market, which is something that we have been trumpeting as an important part of the asset class.
For 10 years now, we’ve been saying that you should think of private equity as an asset class where accessing the secondaries market is a real thing… [This] is something that we believe brings value to private equity investors overall, because you can actually rebalance portfolios easier than you can in listed markets. We’ve been rebalancing the portfolio and showing that we can generate liquidity for our investors, so that they can have the dry powder to deploy in more interesting investing times, like now.
Does this mean that Hermes GPE has been more active in secondaries processes?
There is a continuation fund dynamic at the asset level, [and] that is a big development we have looked at – and are looking at – in terms of particular opportunities, ie, when the GP knows the asset extremely well but it’s held in an older fund that needs liquidity.
We’ve also looked at processes at the portfolio level… We have engineered situations where we have rebalanced portfolios for investors for a number of years and [we have] generated that liquidity for them to be able to recycle that back into fresh capital to be deployed now, and at the same time balance the return profile for someone coming in at this point.
It’s always an intricate exercise, but it is one that I think is a huge benefit. If you look at it at the asset class level and you look at private equity, I think one of the biggest issues has been this mistaken belief that this is an asset class where you get stuck into it and you have to be in those fund[s] of funds for 15 years. This is not the case, because you can engineer these liquidity solutions every five years and provide very substantial liquidity for people to redeploy capital.
That is a mindset shift around private equity that is just a very real part of how we can deliver returns for our investors by managing a portfolio actively. We are a big believer in private equity being a more flexible asset class in this way. We are looking at GP-led situations with interest.