Paul Myners, the former chairman of Gartmore Investment Management and author of the influential review into institutional investment that bears his name, told delegates at the EVCA International Investor Conference in Geneva last week that in order to play its role well within the economy whilst generating value for investors, private equity had to respond to a number of urgent challenges facing it at present.
In a speech that was well received among delegates, Myners said private equity’s role was to help “bring the market back to its senses”. In an environment typified by chaos and uncertainty, private equity managers were the “maggots that cleaned out the wounds.” They should feel good about their work as it helped drive innovation and, unlike other, more speculative areas of investment activities such as hedge fund investing, generated genuine social and economic value.
However, Myners emphasised that in order to perform well going forward, European private equity had to face up and respond to a number of urgent challenges.
One of these tasks was the need for firms to develop a more distinct approach to managing capital. “You have to be able to articulate exactly how you make money”, Myners said, suggesting that there were at least 150 smaller firms in Europe that were lacking a genuinely distinguishing investment strategy.
In order to successfully position themselves in an increasingly competitive market place, firms had to work on their geographic and sector expertise, as well as significantly improve their corporate governance at both firm and fund level. Myners said that in his experience, too few GPs applied management standards that were consistent with those they applied to their investee companies. Better asset gathering skills would be needed as well.
Myners also said that firms would have to work harder to generate returns for their investors going forward. Financial engineering alone could no longer be relied upon; instead firms would do well to hone their operational skills in order to control and actively manage their investors. In many cases this would require a wholesale makeover of skillset inside firm, particularly when succession issues had to be managed as well.
For those that would respond quickly, Myners predicted a wealth of opportunity, particularly in continental Europe. There, demand for private equity investment would increase, whereas in the UK stagnation was more likely. There was also an opportunity for Europeans to exploit the relative weakness of their US peers, Myners said. In the US, he had seen a “total loss of confidence” among venture capitalists, leaving in its wake “huge opportunities for the fundraising of European players”, as US institutions were increasingly looking outside their home market to put money to work in the asset class.