PE needs to speak a language that retail understands – BVCA Summit

Tapping retail money involves better communication on investment performance and the real value that private firms create, according to panellists at the BVCA Summit 2022.

Oxford finance lab director John Gilligan (second left): Illiquidity mismatch with retail is a big issue

As private equity becomes more accessible to individual investors, GPs, LPs and industry associations need to become better at explaining the long-term nature of the asset class and its delivery of outsized returns, a panel has heard.

“The private equity industry needs a language that the man on the street can relate to,” said John Gilligan, director of the Oxford Saïd Finance Lab, at the British Private Equity and Venture Capital Summit on Thursday. He also noted that some performance metrics are not sufficient to convey the real work that firms are doing.

“You talk about your scale a lot. Your investors don’t care about scale at all – they only care about your returns and IRRs. And IRR is the wrong measure,” Gilligan said. “You’re lacking a language that is compelling to anybody outside of your industry, to explain what you’re doing, because what you’re doing is investing other people’s money to create value, and you’re doing it well.”

Joana Rocha Scaff, head of European private equity at Neuberger Berman, said it will be “dangerous” not to engage with constituents and educate them on the asset class.

She noted that while IRR is commonly tracked, it isn’t the only performance measurement that matters to LPs. “We look at money on investment capital. We look at cashback to LPs… And, more and more, we’re also increasingly looking not just at returns per se, but how that return was created – [through] earnings growth, leverage reduction, multiple arbitrage, [as well as] with a bunch of ESG KPIs.

“There was a period of time in the industry that you just put leverage into the companies, and you bought cheap and sold high, and that drove the returns. I cannot possibly believe that many of you buy things very cheap in 2022, 2021 or in recent years. So, the majority of that value creation in our industry has come… or, at least, is underwritten to come from operational value creation that’s largely driven by growth.”

She added: “There’s no reason why the rest of the population, not here, could not benefit from the great returns of the asset class. But it has to be done right.”

Key issues, including the illiquidity mismatch, cashflow predictability, fee structures, governance and managing conflicts of interest, need to be addressed, Rocha Scaff said.

Gilligan noted that the illiquidity mismatch with retail investors is a particularly big issue. “That’s the thing that could bite this industry on the backside harder than anything that has ever happened before… If you mismanage retail money… and leverage your way through it, you will have a problem.”

Michael Moore, director general of the BVCA, said that better communication on investment performance is needed, particularly with those looking to unlock defined contribution capital in the UK and the ultimate stakeholders of those pensions. These conversations, alongside those held with the government, need to change and increase in their regularity, he said.

Moore added that part of the BVCA’s strategy is to “detoxify the conversation”.

“We’ve got to get ourselves to a place where… the value we create for the whole of the country, not just ourselves, is better understood and it’s just locked into people’s minds,” Moore said. “That way, you have a mature, sensible discussion about all the other things that matter to the industry. Without that, we’ll be in trouble.”