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PE market bifurcation brings reckoning for those in the middle

Investor money is flowing toward those that can offer scale, specialisation or both, Partners Group CEO David Layton told PEI.

Firms can no longer ensure success by riding on the coattails of a growing private equity market, according to Partners Group‘s chief executive.

Speaking to Private Equity International after an investor call last week, David Layton said that capital is increasingly being directed toward large platforms that can identify the best acquisition opportunities far in advance. Transaction timelines have shortened so much that it is hard to do the diligence required to make good investment decisions.

“Resources matter right now, and [it benefits] the firms that have a lot of resources and can spend speculatively on researching assets that aren’t for sale,” he said. “If you’re a smaller firm with five, six, seven partners sitting around the table, you have to focus on what’s for sale today. And it’s a competitive disadvantage.”

Partners Group uses a matrix of around 50 investment themes to try to identify the best-positioned companies. It is tracking “dozens and dozens” of assets that might not be for sale for several years, according to Layton.

High inflation and rising interest rates also benefit larger firms with multiple product offerings, Layton said. Limited partners are increasing their exposure to strategies such as floating-rate credit and CPI-linked infrastructure and doing so through a shorter list of GP relationships. The PE market is likely to barbel between these groups and smaller, specialised players.

“The medium-sized generalists are going to have to figure out how they compete,” Layton said. “You have a lot of firms that have been going long on leveraged equity and participating in the emergence of the [private equity] sector more broadly. They’re going to have to find some differentiation in order to be relevant 10 years from now.”

Partners Group reported growth in assets under management of 17 percent in 2021, equivalent to $25 billion, bringing its total AUM to $127 billion, according to a statement. Bespoke client solutions accounted for 62 percent of the total, comprised of $8.9 billion in institutional separately managed accounts and $6.5 billion in evergreen funds aimed at individual investors.

“Your typical private equity fund is not a great tool for steering allocations. Oftentimes people don’t know when their capital is going to get called, they don’t have great transparency on what they’re invested in, and they don’t know when that capital is going to be returned,” Layton said about the growing preference for more customised solutions.

Partners Group is in market targeting $4 billion for its latest secondaries fund, according to PEI data. Its most recent buyout fund Partners Group Direct Equity 2019 closed in 2019 on $15 billion.