If the wood-panelled walls of Standard Life Investments’ Edinburgh headquarters could talk, they could certainly give some interesting insights into the European private equity industry’s journey through the financial crisis.
David Currie and his colleagues at SL Capital Partners, a fund of funds firm with with €6.2 billion under management, have had their hands in some of the industry’s highest profile situations over the last 24 months. SLCP investment professionals sit on LP advisory boards for the likes of Candover Partners, Terra Firma, Alchemy Partners and Permira among others. Currie’s own portfolio of advisory board positions includes the likes of CVC Capital Partners, Advent International, Barclays Private Equity and Charterhouse Capital Partners.
Being an active member of the limited partner community involves steering funds through both good times and bad and during the financial crisis, there have been plenty of bad times. Currie declines to comment on the specific cases the firm was involved in. SLCP’s chief investment officer Peter McKellar, for example, chairs the LP advisory committee for Candover Partners, a firm brought to its knees by the crisis. He would have played an instrumental role in steering the partnership through a painful year-long process – triggered by the withdrawal of the cornerstone LP – which ultimately saw a €3 billion fund reduced to just €100 million.
The role SLCP plays in steering its GPs through both good times and bad, says Currie, is a key factor in the importance of fund of funds groups to the private equity industry and one way in which these platforms justify their fees. Whether it means debating the future of Candover Partners with other LPs or steering Barclays Private Equity on its potential spin-out, “Many LPs don’t have the skills to do this well,” says Currie.
Indeed, ask those GPs who regularly deal with SLCP and they echo the fact that the firm is a useful and “constructive” LP to have in the investor base (as well as just being all round “nice guys”). “They are sensible, helpful and very knowledgeable about the private equity market,” says Martin Halusa, chief executive of Apax Partners. One European mid-market manager goes as far as admitting there are probably some things they could discuss with SLCP that they would not mention to other LPs.
“In the good times up to 2007 when there weren’t many problems, people overlooked the importance of experience,” says Currie. “But since the downturn, there have been quite a number of problems with funds that have had governance and structural issues.” Currie qualifies this comment by adding that although SLCP has its share of “issues”, he feels that it probably had fewer than many of its competitors.
“We typically get an early heads up of any potential problems and can work with the funds to sort them out,” says Currie, who adds that the risks of getting the “heavy lifting” of these fund restructurings wrong should not be underestimated.
Fortunately Currie does not anticipate another Candover-style situation in the near future. “[The problem] was caused by liquidity issues at the parent Candover PLC and I think those liquidity issues are behind the industry unless there is another banking crisis,” he says.
The next wave of crisis-related casualties will take longer to materialise, notes Currie. “There will be other issues for fund managers – such as inability to raise a new fund – but that will take time to emerge. I think the industry has passed the bottom of the cycle and is slowly picking up, but it is going to take time.”
REBUILDING IN BOSTON
Aside from the ongoing task of being an active fund of funds platform, there are more progressive plans afoot, with an immediate focus on the North American market. North American fund investments currently constitute around 10 percent of SLCP’s total exposure with the remainder made up by European funds. Currie wants this to have moved to a 20/80 split within the next four years and ultimately for the two regions to represent an equal share.
The effort to grow the North American part of the business follows what can only be described as a significant setback in that part of the world three years ago. In August 2007, the firm suffered an exodus of its US staff, with its six investment professionals walking out en masse. The split came after Standard Life Investments sold 40 percent of the fund of funds business to nine Edinburgh-based managers, creating the semi-independent SL Capital Partners. None of the Boston-based US team participated in the deal, but were instead invited to become employees of the firm. The departing team has subsequently set-up shop independently as Constitution Capital Partners and is managing a $750 million programme on behalf of the Universities Superannuation Scheme.
With the US walk-out consigned to recent history and the Boston-based office now home to four investment professionals, the plan is to expand the product range and raise more capital. The team is understood to be raising its third North American fund, which will invest in funds of up to $1 billion in size. This represents a slight departure from the existing two North American vehicles, which have targeted funds of up to $3 billion. A similar product in Europe – targeting smaller funds of up to €1 billion – is currently being soft-marketed to LPs, sources say. Currie declines to discuss fundraising activity, but does note that as well as any new products the firm will always raise its broader generalist funds.
Currie’s demeanour fits well with the wider market perception of SLCP as the home to a pleasant and affable team. At a number of points during the interview a subversive sense of humour bubbles through his serious façade. He is softly-spoken, lacks any outward indication of bravado or arrogance and delivers his thoughts on the industry in an uncomplicated, forthright manner. And yet one suspects that he is not afraid to dig his heels in when necessary; the partial spin-out and subsequent parting with the former North American team seems testament to that.
When he assumed the role of chief executive officer in late 2006, Currie took on the significant task of replacing Jonny Maxwell, the high profile founder of the platform who spent 17 years at its helm. Maxwell, whose departure from the firm was unexpected, went on to run the fund of funds programme for German insurer Allianz. He casts a long shadow and to many in the industry SL Capital Partners is still closely associated with his name.
Currie has not shrunk from the task and under his leadership, the firm has “developed well post-Maxwell”, says one GP. During Currie’s tenure, SLCP has attracted clients such as the California Public Employees’ Retirement System, for which it manages a €500 million European programme.
Currie’s own private equity CV begins with a nine-year stint at 3i Group followed by a seven-year period developing the private equity fund investment programme for Abu Dhabi Investment Authority (ADIA), the vast sovereign wealth fund. He joined in 1991 and helped build the sovereign wealth fund into one of the world’s most influential private equity investors. He moved straight from ADIA to Standard Life Investments in 1998, but his respect for the role sovereign wealth funds play in the private equity landscape is undiminished. Currie considers them, alongside funds of funds, to be among the most proactive investors in the asset class. Furthermore, he considers their importance to private equity firms to be growing all the time.
“I think sovereign wealth funds will become one of the biggest forces in the private equity industry,” he asserts. “They control a huge amount of long-term capital and have bought into the concept of private equity. Some of them, like GIC and ADIA, have now been doing private equity for a long time.”
There are, Currie concedes, a number of sovereign wealth funds who arrived to the asset class more recently during the good times, saw money being raised and cash being returned “in the blink of an eye”, only to find the party suddenly stopped. But the longer-standing funds, says Currie, can see that this is just one point in the cycle.
Currie goes on to point out the dangers these sovereign funds face when they start to invest directly in companies. “Buying and owning companies direct is fine for when things are going well, but if something goes wrong you will probably get a fairly significant negative reaction. There are political, social and reputational issues.”
If they stick to their role as LPs, then they will become the dominant LPs in the industry, Currie adds. “They have a lot of muscle to throw around and they can influence terms to their advantage – and probably to the advantage of other investors.”
Does it make Currie nervous when sovereign wealth funds start buying stakes in general partners? Only if they then become a dominant LP, he says. “One of the lessons we learned from what happened at SVG and Permira or Candover PLC and Candover, is that where you have a very large limited partner with a connection to the general partner, you need to be mindful of the counterparty risk.” This situation adds a whole new dimension to due diligence, says Currie. “In a way it brings it back to: Is the GP effectively a captive?”
One of SLCP’s qualities that Currie is keen to stress is the ability to be an effective co-investor. Direct investment experience among the team – Currie points to his own experience at 3i as an example – is vital in being able to respond to the due diligence and management demands of effective co-investment. “Many investors talk about co-investment but few are set up to be able to respond quickly and understand the risk-rewards,” he says.
Given that this is such an important element of SLCP’s programme – 30 percent is allocated to direct co-
[GPs] had never had an LP take them out for a beer rather than the other way round
“We have actually actively marketed ourselves and our co-investment capabilities to GPs,” Currie responds. “GPs were shocked when we came to them to present. They had never had an LP take them out for a beer rather than the other way round.” Currie adds that as well as this proactive approach, SLCP’s track record of deal execution is key.
SLCP’s core business has always been European private equity and it is latest fund, European Strategic Partners 2008, is about to close on near to €700 million. As expected, fundraising has not been an easy process. Like many funds in market during 2008 and 2009, the marketing period was protracted, with investors consenting to extend the fundraising by up to nine months.
Aside from all the familiar tribulations of the private equity fundraising market during the financial crisis, Currie’s team has had the difficult task of selling a European strategy at a time when the continent – from a macroeconomic perspective – does not compare favourably with most other markets. “[The European economy] has been an issue – particularly among North American investors,” says Currie. But while investors “express concerns” about the European macro view, Currie insists that it is good time to invest in the region, because “disruption generally throws up opportunities”. He adds that, while the recession has been very severe, the slew of corporate disposals – a good source of private equity buying opportunities – has not yet happened.
That said, Currie concedes that any recovery is still very fragile: “There are still dangers out there: the cuts in government spending will work through the system and reduce demand. The recovery will be relatively slow, and it is conceivable that there could be a second dip.”
Reports from SLCP’s general partners are equally cautious, with debt still difficult to obtain and “starting to tighten up again”, says Currie, although “what we do hear now is that can be an attractive time to be selling”. He does not, however, consider this sellers’ market to be a “bubble situation”: “Volume is too low for this and good high quality companies have always been able to command decent premiums.”
SLCP currently has no exposure to the emerging markets, but this is a matter under review. Asia in particular is continually on Currie’s radar. “The challenge is to find the right way to tackle what is a large and diverse market and we are continuing to work through this exercise,” he says, adding that the firm has yet to decide whether to go it alone or combine forces with a local presence. “Both are options we are considering.”
While full-on assaults of new geographies may still be in the gestation period, SLCP is trying to forge GP relationships in new markets via an increased focus on the secondaries market. Last year, the firm took on Patrick Knechtli, formerly a principal at secondaries specialist Coller Capital, to enable the firm to undertake large secondary transactions. The firm will look to forge new relationships with managers in new markets through the acquisitions of bundles of LP interests in the secondaries market.
In recognition of the increasing importance of the secondary market, ESP 2008 has an increased allocation to secondaries; it can invest up to 30 percent compared to its predecessor’s 10 percent. The fund has as yet done one secondary deal. Last year it picked up a largely unfunded interest – only 15 percent invested – in CVC Capital Partners fifth fund, which had closed by the time ESP 2008 had built up investment capacity. “Effectively we got a 15 percent funded high quality fund that we rate for very little outlay,” says Currie.
As for a standalone secondaries programme, there is nothing on the cards yet, says Currie, who is thankful SLCP didn’t wade into the hot secondaries fundraising market during 2009. “It is a good thing we didn’t, because there was an expectation among investors that the money that a lot of fund of funds and other groups had raised was supposed to be deployed very rapidly into some very attractive largely unfunded secondary opportunities,” he says.
“These funds in reality only had a three month window last year where there was true distress,” he adds. “Most of that distressed selling of positions has passed for the time being, so if you did not commit your capital then, how are you going to deploy it?”
He elaborates that the market has moved on to a “different stage”, in which the banks and insurance companies become the main source of deals as they wind down their exposure to the asset class, because of regulatory and balance sheet pressures.
The withdrawal of banks and insurers from private equity is likely to dramatically affect the asset class, says Currie. “If you have a lot of insurance companies and banks in your investor base, then you could suffer quite seriously,” he warns, noting that SLCP’s LPs are “predominantly pension funds”. Solvency II, an incoming European directive on capital adequacy requirements, “will drive a lot of insurance companies to dispose of their private equity investments,” he says.
This comment leads to a salient topic of conversation. The heavy wood panelling in the hallways of Standard Life Investments’ Edinburgh office, an elegant giant of a townhouse on George Street, serves as a reminder – if a reminder was necessary – that SLCP is itself semi-captive. It is majority owned by Standard Life, a life assurance, pension and investment giant with 185 years of history. Standard Life owns 60 percent of the management company, with the remaining 40 percent shared between the eight partners.
The question is: in light of the changing regulatory landscape, will SLCP remain part of Standard Life Investments? The answer, says Currie, is “probably”. “There is always the possibility that something might occur that might cause this to change,” he says, referring specifically to a change of ownership of the parent company. “Then we would have the right to secure the future of the team and give our clients continuity.”
SLCP has been shifting the balance of its capital base from Standard Life’s money to third party investors’. Outside investors now account for 75 percent of its assets under management, so if Standard Life was to withdraw from private equity, the results would not be disastrous for SLCP.
However, the manager leans on its parent for more than just money. The presence of a stable parent with almost 200 years of history is taken as “a great comfort” by SLCP’s LPs in some parts of the world, says Currie. “[They] think it gives us an added layer of security.” Furthermore, Currie is keen to take make more use of Standard Life’s institutional connections – which are extensive across North America, Europe and importantly Asia – for distribution purposes.
So what is next for SLCP? Parallel to the drive to open up new geographies is a desire to expand the product range beyond private equity into other asset classes. While plans at this stage are not concrete, potential new business lines under review include infrastructure, mezzanine and private equity real estate: “all things our investors have expressed an interest in.”
“We are giving thought to those and how they might fit with our organisation. Would it make sense and add value to investors? That is the key,” he says.