Partners Group’s Layton on SPACs, GP stakes and valuation risk

David Layton, who will become Partners Group’s sole CEO in July, speaks to PEI about the leadership change, opportunities in the defined contribution market and why SPACs have been ‘overdone’.

Partners Group this week said David Layton will become sole chief executive at the firm as André Frei, co-chief executive, steps back to move into a new post as chairman of sustainability.

Layton had been co-CEO alongside Frei since 2019 and previously served as head of the firm’s private equity business in the Americas.

The change will take place on 1 July, the firm said.

The leadership change at Partners Group came as it reported financial results in 2020, in which the firm’s assets under management grew 16 percent year-on-year to $109.1 billion as of end-December. The Zug-headquartered firm received $16 billion in capital commitments in 2020, exceeding the firm’s guidance of between $12 billion and $15 billion for the year. Private equity made up 40 percent of capital inflows last year at $6.4 billion.

Private Equity international caught up with Layton following the firm’s annual results call on Tuesday to discuss the change and his thoughts on the latest developments shaping private equity.

How do you expect the demands on your time to change once you become sole chief executive in July?

David Layton, Partners Group
Layton: SPACs will be judged by the quality of the assets they bring to the market

As a co-CEO with André, I would focus on investments and he would focus on clients and corporate, with some crossover on topics. But you could expect in July that I’ll be spending more time on client and corporate topics, like fundraising and operations, and probably a little bit less time on investments moving forward.

That said, I’ve come up in the investment business and I’ll always have a meaningful part of my time dedicated to that.

Partners Group has more than a quarter of its AUM in evergreen programmes – how much of that will come from US defined contribution programmes in the future?

The defined contribution market in the US is a big opportunity – there’s no question about it. You have these target date funds that are very professionally managed and have similar needs to defined benefits programmes. Many of them have been exploring intensely what private markets can do for them since this past summer when the Department of Labor issued their information letter that they are supportive of including private equity allocations in 401(k) plans.

Our chairman [Steffen Meister’s] analogy from our annual results call on Tuesday was an interesting one. He said he believed that the adoption of private equity by 401(k) programmes will follow a similar curve to the one followed by defined benefit programmes in their adoption of private markets 30 years ago. That is, dip their toe in the water first, then explore. Once the market decides that this is something that they want, you will see this very quick adoption curve – that is what we’re expecting.

We’re still in the ramp up and education phase right now. We’re having a lot of very interesting discussions with programme managers, 401(k) providers and even other private markets firms. We expect the market to evolve and more offerings to emerge so that plans can compare and contrast options – and we’re helping with that. You need a deeper market in order for people to be able to run a sophisticated search for the best solution for them.

You mentioned during the call the difference in the calibre of buyer between PE firms and some SPAC sponsors that have raised capital quickly. Is a duty of care arising for PE owners contemplating the sale of their assets through a SPAC?

As it relates to how SPACs versus PE firms are approaching the market, the PE industry has been around for a while and many firms have developed a very sophisticated approach to origination, underwriting and governance, compared with many SPACs. It certainly seems like SPACs have been overdone by the market.

On the one hand, you have some very professional managers who have raised capital in SPACs. On the other side of the equation, you have some amateurs who have taken advantage of the market frenzy. A lot of SPACs don’t necessarily have a professional organisation built around investments. And that’s in contrast to the private equity industry where managers like us have had searches going on for years and have entire expert teams dedicated to originating transactions in specific sectors. They’re able to speak to business owners in real detail and depth about the companies that they own and why they’d be the right investor and how they can add value.

As a seller, you have this company that you have taken time to grow and develop and built stakeholder impact projects with. Of course, you will naturally feel some responsibility to put it into good hands. What I’m most interested in is the performance of these SPACs post-merger. And I think that’s ultimately how SPACs will be judged: do they bring quality assets to the market? Do they run them with integrity and with real leadership? And do those assets outperform the index over the long run? I think that’s still yet to be proven.

What are your views on the growing market for GP stake sales?

The market for GP stakes is becoming more prominent. The path to exit and liquidity is still somewhat unproven. But the industry has evolved enough to the point where there is a reasonable assumption that there will be some form of financial capital that would be willing to step in in five years and take you out of your position.

The beauty of our industry is the alignment of interests that we have with our investors and clients. The investment pitches some GP-stake investors are making to asset management firms is purely a financial proposition. If the GP stakes market, or certain providers within the GP stakes world, turn it into just a factoring exercise for carry, it creates misalignment between the investment manager and the ultimate investor and that alignment of interests is lost.

We have thought a lot about how to institutionalise the private markets industry. Within real estate or infrastructure, for example, you have seen us invest in platforms and that could be characterised as a GP stake purchase. But it’s always been done with a genuine investment approach and with the mindset of creating a leader. If we find an asset management firm that we believe in, which has something unique, and we can help institutionalise their business, then that could be attractive to us. But I’m not interested in a purely financial exchange to help a GP pull their carry forward.

What’s the greatest source of investment risk Partners Group is seeing now?

We’re a firm that is a big believer in scenarios. The market is at an elevated point at the moment and pricing is among the larger risks that we’re exposed to – we factor in a multiple contraction in our underwriting.

We’re managing that risk in two ways, both tied to our value creation mindset. One, by backing platform companies and averaging down our upfront purchase price through subsequent acquisitions.

Just about every one of our large portfolio companies is ahead of plan on their acquisition strategy. There are a lot of smaller competitors to our portfolio companies that have woken up to the realisation during this past year that they’re better off aligning with a larger platform. With Foncia, a French property management services provider, for example, we’ve brought down our upfront purchase price by about 20 percent in the last couple of years by buying smaller tuck-in acquisitions.

The second way we’re managing this is through our other value creation efforts. The hands-on operational improvements that we implement are probably the single best way to mitigate the market risk that I can think of.

David Layton is co-chief executive of Partners Group.