Last month I wrote on this page that limited partners should get involved in defending the merits of private equity as an asset class. On 19 February, a senior member of the European limited partner community finally did.
In a letter to the Financial Times, Danny Truell, chief investment officer of the Wellcome Trust, acknowledged that in the growing controversy surrounding hedge funds and private equity, the owners of these funds had been largely silent. No good, he implied, and went on to make clear why alternative assets were important to the Wellcome Trust.
Truell's group is the largest charity in the UK. It is also Britain's largest institutional investor in alternative funds, with a £6 billion (€8.9 billion; $11.7 billion) investment portfolio.
In his letter, Truell explained that Wellcome's charitable expenditure (£484 million in 2006 alone) depended upon the performance of its investment portfolio, to which private equity and hedge funds had been “significant” contributors for more than a decade.
It would be a mistake, he went on, to change the tax and statutory rules under which alternative investment funds have flourished in Britain: interference “without due consideration” would hurtWellcome's investment returns and force it to deploy a larger portion of its capital abroad.
Truell also said that calls for taking action against private equity's alleged lack of transparency were misguided. “Our experience is that the quality and consistency of the information provided by our 190 ‘alternative’ managers is at least as good as that provided by traditional managers, although neither group makes the information available to the public,” he wrote.
The industry should be grateful for Truell's intervention. The majority of the limited partners that PEI's journalists have spoken to in recent weeks insisted that it was the responsibility of the trade associations to publicly engage the industry's critics. They – rightly – pointed out that the European trade bodies are doing a great deal of work in this regard already, with the BVCA in London and the EVCA in Brussels leading from the front.
However, given the anger and hostility confronting UK private equity at present, this work is not enough. There clearly are issues – such as investment performance and transparency – where, as investing clients of private equity firms, fund investors can speak with greater clout than a GP-sponsored association. Their real life illustrations of why private equity plays an important part in their allocation strategies are at least as powerful as the more abstract statistics that the trade bodies specialise in.
Tellingly, the FT deemed Truell's letter important enough to discuss it on its front page – evidence that limited partners do have a voice and can use it effectively at a time when private equity as an industry is under siege.
Limited partners who until now have been reluctant to join the debate may find it comforting to know that there may still be plenty of time to get involved. According to a study published by UBS in mid-February, the current LBO cycle is in full swing – that much seems obvious – and may well continue for a significant period of time.
The investment bankers argue that leverage levels, premiums paid and deal volume all remain at moderate levels. Whereas in the late 1980s the buyout boom was a USonly phenomenon, 50 percent of today's activity is non-US, which means the asset pool is larger as well. And: “In market-cap relative terms in both regions, buyout levels would have to triple to reach 1980s peak US levels.”
If UBS is right, and barring an external shock to the system, Europe stands to experience more rather than less private equity activity before the market slows. Until then, the arguments between financial professionals, politicians, regulators, trade unions and journalists are bound to continue, too – albeit hardly with the feverish intensity of the past few weeks, which have been remarkable in this regard
Limited partners who thus far have chosen to stay out of the controversy should think about whether they really don't have anything to say. The private equity industry's current dynamism is clearly not without its dangers. But those wishing to rein it in should be cautioned against throwing the baby out with the bathwater. In terms of moral authority, a widely admired charity such as the Wellcome Trust may be exceptionally well positioned to influence the debate. But other private equity fund investors should have the confidence to make a contribution, too. The urgency is certainly there.