When it comes to European private equity markets, concerns over the repercussions of the Russia-Ukraine war, an energy crisis and soaring inflation appear to have dented some LP appetites.
According to Private Equity International data, Europe-focused funds accounted for only 8 percent of global fundraising last year – the lowest proportion since 2012.
Not every LP shares the same concerns: Hong Kong’s DL Family Office falls into this latter camp.
Founded in 2012, the multi-family office is a subsidiary of Hong Kong-listed financial services provider DL Holdings, which has $3 billion of assets under management, according to its website. DL Holdings was co-founded by a couple – TV news host-turned-private banker Crystal Jiang and her husband Andy Chen; its initials stand for “delivering legacy”.
PEI caught up with DL Family Office chairman Donny Lam in April to discuss how the organisation is approaching private equity in 2023.
When asked where he is currently most bullish, Lam said he would bet on Europe.
“Now is the best timing,” he said. “[There is] demand for money as the firms want expansion or for credit, etc. The operating company has the least bargaining power and that’s why the buyer – the big buyout firms – have the highest bargaining power since financing is tough. We are looking long for this: we are not looking at one, two years – it’s three, five years.”
According to DLFO’s website, Lam has served ultra-high-net-worth clients for over 30 years. He previously worked as a managing director in private banking at JPMorgan and HSBC and is also an adjunct associate professor in finance at The University of Hong Kong.
As a multi-family office, their clients come from China, Taiwan and Hong Kong. While investment appetites differ from client to client, Lam said they usually have allocations to developed countries, including China, and avoid Latin America, Africa and Eastern Europe. Within Asia-Pacific, Southeast Asia is the lowest priority due to a limited supply of large buyout deals. It has recently “slowed down a bit on China” as funds are not exiting as quickly and families’ portfolios still carry previous commitments, Lam added.
DLFO’s clients have individual mandates, meaning its allocations are decided on a case-by-case basis rather than as a single institution. Though some clients shy away from alternatives because of its illiquidity, for those who invest in PE, “we do recommend a certain percentage… around 10-20 percent at most”, Lam said.
“And so we gradually build it up. Our investment philosophy in choosing private equity is to monetise the liquidity premium.”
DLFO prefers to invest through funds rather than direct investments, Lam said, noting that its size makes the latter challenging. The organisation has capacity to make commitments in the high-single-digits millions of US dollars.
“Basically, we cover generically all the products, but we do not focus too much on direct deals – we are selective because we are just a small team,” said Lam. Of DLFO’s 25 staff, eight focus on investments and three specialise in alternatives.
Consistency is important to DL; the family office prefers large buyout deals and mature growth stages to venture capital. This is because the due diligence process “involves too much time and too much effort”, Lam said. In terms of sector focus, DLFO is interested in secular growth businesses linked to consumers, application technology and healthcare. “But we are not that keen on new drugs because I find this too risky,” Lam said, noting that deep tech is also “quite uncertain”.
DLFO does not disclose its GP partnerships.
DLFO and its family office peers are becoming more professionalised and selective as investors, which means the bar for new GP relationships has been raised, PEI reported last month. Though a track record of good performance is a useful rule of thumb, when choosing GPs, Lam said DLFO also prefers going deeper into the manager’s team culture and investment alignments. Family offices more broadly are increasingly focused on these characteristics.
“I would like to deep dive a bit more on the culture of the firm, what kinds of deal they would pursue or not pursue and how they did the thinking process, the philosophy behind it,” Lam said.
Though some investors may hold back on private equity due to its comparatively high management fees, these play little part in Lam’s decision-making. “Performance is a lot more important than the management fee,” he noted.
Lam said DLFO’s business resources and his own connections from previous roles mean the family office is in no shortage of investment opportunities. And, with global fundraising more of a challenge for many GPs, getting an entry ticket is now easier. “I think that it is slightly not as difficult as before,” said Lam, noting that the multi-family office is not currently seeking new GP relationships and instead focusing on re-ups with existing managers. “We still carry on with our own pattern [of investing],” he added.
As fundraising momentum continues to be slow, first-time fund managers are having a hard time sourcing capital. DLFO would also rather commit more to blue-chip GPs than boutique ones, preferring to start with a small commitment to the latter and observing their performance over time. “We’d rather be slow than wrong,” Lam noted.
Less privacy in private equity?
Though enthusiastic about the asset class, Lam said more transparency is needed, particularly around the structure of deals, exit strategies and valuations. “How do they determine the price? How do they control and make sure there’s no conflict of interest between the firm and the GPs?” he said. “There should be a kind of transparent, standardised methodology to valuate companies.”
Valuations have been a source of consternation for many investors over the past 12 months, with private markets portfolios slow to reflect volatility in the public markets. LPs are seeking a better understanding around valuation processes and more detailed, real-time information on portfolio company performance.
Amid these turbulent market conditions, exiting at a favourable price has become more of a challenge. Exits have slowed and managers such as EQT are increasingly exploring alternative liquidity methods such as continuation funds or partial sales to return cash to LPs. While some investors are amenable to holding assets for longer via GP-led processes, Lam is not a fan. “I’d rather sell it, crystallise return – good or bad – and then do something next.”
In the current fundraising landscape, Lam expects some GPs to fall short of their initial targets – something which may work in LPs’ favour. “Sometimes we will ask the GP: ‘Why do you raise so big a size – do you think you can deploy all the money [in a] timely [fashion]?’ Because we don’t want the GP to just deploy for the sake of deploying,” he said.
Looking ahead, Lam remains positive about PE. Though some of DLFOs clients may be intimidated by the illiquidity of alternatives in the first place, he is quick to note that some public equity strategies also require a longer holding period. “Of course, we cannot be like Warren Buffett holding Coca-Cola for all your life,” said Lam. “But I think that PE is a good part of asset allocation; if you’ve done enough homework, that should justify your investments and history tells [us] it is right.”