The ‘price’ to pay for going multi-strategy

GPs must be prepared to ramp up checks and balances to bring LPs on side, Neuberger Berman and BC Partners executives told the British private equity conference.

“Conflicts are obviously inherent if you decide to [do] multi-strategy.”

This was the view of Joana Rocha Scaff, head of European private equity at global fund of funds manager Neuberger Berman, speaking at the British Private Equity and Venture Capital Association’s annual conference in October. The firm deploys roughly €1.7 billion a year to private equity funds evenly across mono- and multi-product strategies, with the latter growing in size, she noted.

Scaff identified deal allocation – when different strategies could compete for the same asset – as one of Neuberger Berman’s top concerns for general partners expanding into new strategies.

“That needs to be made very clear to investors,” she said.

BC Partners is one of the latest private equity shops to enter a new asset class. The London-headquartered firm – which expanded into private credit in 2017 – launched a real estate platform in May, Private Equity International reported.

Partner Nikos Stathopoulos, who joined Scaff on the BVCA panel, said concerns over resource allocation in multi-strategy firms were “natural”. He pointed to a number of measures BC Partners had undertaken to minimise such risks, including keeping the credit and private equity teams separate bar one or two individuals on the investment side to “cross-judge the transactions”.

Private equity and credit funds run by the same sponsor, for instance, could come into conflict if both are stakeholders in different levels of the capital structure of one asset. BC Partners does not pursue such deals, said Stathopoulos.

“Anyone who decides to diversify needs to be prepared to increase the compliance, increase the transparency, increase the checks and balances, because that’s what the LPs will require,” Stathopoulos said.

“That is the price that you pay if somebody wants to diversify away from remaining one product. That’s what actually protects us from […] making a mistake.”

The appeal of multi-strategy firms differs depending on who you are.

For BC Partners, it was about expanding to consolidate its relationship with investors.

“We think it reinforces the relationship, makes us increasingly relevant and actually helps us grow, because at some point, if you have a mono-product firm there is potentially a cap on how much you can grow,” Stathopoulos said.

For Neuberger Berman and Scaff, there is one main reason to support multi-strategy firms.

“At the end of the day the judge is bottom-line performance and the synergies one is extracting from that. I’d say the area probably where I see the least synergies is across asset classes, like real estate, private equity and infrastructure.”