Family guys

Hall Capital Partners, an investor in private equity since 1994, reduced the amount it committed to private equity in the last two years but has ramped up its focus on emerging markets and distress.

Last year, there “weren’t a lot of buyout funds of quality in the market”, says co-head of private equity Kirk Dizon, adding “there was not a lot of urgency to do buyouts in 2008/2009”.

Certain strategies, however, within private equity are still attractive, according to Dizon and Reed Saouaf, who co-heads the private equity programme. The firm focused a large portion of its commitments in 2008 and 2009 to emerging markets and distressed investment managers, Dizon and Saouaf say.

“Out of the $220 million we committed, we committed about $35 million to buyouts, $20 million to venture capital, and the rest of it to emerging markets growth and primarily US and developed markets distressed,” Dizon says.

Hall Capital’s clients are mostly wealthy families with assets of between $100 million and $1.5 billion. The firm has 125 clients and about $19.5 billion under management.

Hall Capital has been committing to emerging markets funds for several years, starting with a focus on China. More recently, the firm has been increasing its exposure to India and South America, especially Brazil.

“For us, we’ve been consistently in China for a number of years and have quite a meaningful allocation there,” Saouaf says. “Brazil is newer to us. From our view point, there is a very small subset of managers who have been building expertise and deal flow and reputations in that market for 10 to 15 years.”

Brazil is getting more crowded with developed market firms becoming active in the country. “There’s always the potential for a bubble in valuations, but we believe that disciplined investors should be able to profit from the fast growth in the economy,” she says.

The key to success in the emerging markets is finding “the local players”, adds Dizon, “who have a history of being able to source and execute good deals… and more importantly exit them”.

The biggest advantage in the emerging markets is “first mover advantage”, says Dizon.

“The fact that people know you’ve done the best supermarket deal in Brazil, or the best dairy deal in China – first mover advantage is so important to getting preferred sourcing and not necessarily having to pay the highest price for deals. This all helps to mitigate bubble and exit risks,” Dizon says.

Hall Capital has not been too enthusiastic about secondary managers. The firm has looked out for “interesting opportunities as a result of the market dislocation”, Saouaf says. The problem was, even with pricing at a discount, the opportunities just weren’t that attractive, she says.

“There was a brief window of time when, depending on how the world played out, you could have gotten mega-buyout fund exposure at a deep discount,” Saouaf says.

In the current environment, however, secondaries have become even less attractive as asset prices have recovered, she says. “Pricing now is not compelling to us vis a vis primary allocations to top-tier managers.”
Distressed investing has and will remain attractive as debt comes due, and a significant number of companies continue to struggle in the uncertain environment.

“We believe there will be steady distressed opportunities, enough for the best managers to do some excellent deals,” says Saouaf.

As far as governance goes, while Hall Capital often has an active and constructive voice on LP advisory boards, the firm is not the type of partner “to go through every page of the partnership agreement and look for a term to change. We don’t foist the [Institutional Limited Partner Association] guidelines on GPs and ask them why they’re not adhering to them”, Dizon says.

Instead, the firm looks for an “economic and governance package that aligns interests and is fair and reasonable to everybody”, Reed Saouaf says. “It’s not about negotiating every detail. These are ultimately partnerships between LPs and GPs, and everybody should conduct themselves in that way.”