Multi-strategy expansions may stymie traditional PE

A trend towards asset management could have a negative impact on firms which cannot expand, delegates at the BVCA Summit 2017 heard.

A growing trend of general partners expanding into multiple asset classes could threaten the traditional “entrepreneurial spirit” of private equity.

Speaking in London at the British Private Equity & Venture Capital Association Summit 2017 on Thursday, Adam Turtle, co-founder of placement agent and advisory firm Rede Partners, said limited partners had become more tolerant of platform extensions in recent years.

“It was almost a sacred cow for investors that if they started hearing about other managers who didn’t fall into the halcyon group trying to do it, they would get fairly major pushback,” he told delegates.

“It could have quite detrimental consequences, the perception that you were going off strategy. There’s a big trend where we’ve reversed the knee-jerk absolute negative sentiment towards those managers thinking about that and it’s become [a] much more sophisticated [decision-making process].”

Carlyle, Blackstone and EQT are among managers who have broadened their remit to include strategies such as credit funds and growth equity in addition to vanilla private equity. Simon Marc, managing director for private equity at PSP Investments, attributed the move towards diversification in part to diminishing management fees.

“Where it’s becoming more challenging to make a return then scale is becoming increasingly important,” he said. “If you still want to be able to serve decent returns to investors when fees are coming down [and] it’s under pressure, that’s why having a scale to your business is going to make it relevant.”

Turtle warned that the trend away from a “cottage industry” towards institutional asset management could be disadvantageous for firms which rely on the talents of a small number of executives. They could lack the resources to avoid conflicts such as balancing the amount of time dedicated to each asset.

“Very entrepreneurial private equity firms that are based around one or two individuals’ expertise probably aren’t so suitable for that because when you try and manage the conflicts… you remove the real point of the value of the manager,” Turtle said.

“It’s going to become the exception rather than the rule to have groups of scale that don’t have multiple products, and you could argue a competitive disadvantage for that stay single-line.”

The trend could also make it harder for spin-outs to find talent as large-scale enterprise funds hoover up staff to manage assets. “For smaller groups it’s becoming quite challenging to be able to operate at the right level of expertise and have the bandwidth and capacity which takes time to create value for investors,” Marc added.

Private equity remains an industry where barriers to entry are quite low, and as a result a continuous cycle of new managers will emerge and grow in time, Marc said.

“To me the key point is really that for people who are stuck in the middle, it’s becoming a more unpleasant place to be.”