Perspectives 2017: On the mind of the top LPs

Robert Coke, head of absolute return and buyout investments at The Wellcome Trust
Murray Grant, managing director of intermediated equity at CDC
Jan Radberg, head of Private Equity at Swedish pension fund AP1
Ash Williams, chief investment officer at Florida State Board of Administration
Neil Randall, senior director of private equity at Teacher Retirement System of Texas

What issues keep you awake at night?
Murray Grant: “Nothing has changed starkly enough to keep me awake, but I’ve been worried by currency instability in Africa, in particular countries like Nigeria, which has resulted in a slowdown of the speed of capital deployment while investors wait for calmer waters.”

Robert Coke: “Liquidity has driven asset prices up and presumably the withdrawal of it will take them down – tapering is therefore a concern. But our portfolio is designed to generate cashflows in all circumstances and we would hope to be in a position to take opportunities as they come – as we did in 2008-9.”

Neil Randall: “The potential for lower returns across PE.”

Jan Rådberg: “Nothing keeps me awake at night but I am concerned about the fact that we are late in the investment cycle and acquisition multiples are high and what impact this will have on private equity returns going forward.”

What surprised you most in 2016?
Ash Williams: “General Partner discipline. The last couple of years have been characterised by record amounts of capital distributed back to limited partners and very successful fundraisings by GPs. Yet, in general, GPs have shown discipline when making new investments, evidenced by lower-than-expected deal volume and increasing amounts of dry powder in the industry. GP behaviour seems to indicate a belief that we are near the end of the current market cycle.”

RC: “Brexit and Donald Trump. Globalisation and the disruptive power of technology is unsettling many people. Those of us in a position to take advantage of the opportunities need to remember to balance the pursuit of profit with the common good, or risk having neither.”

NR: “Valuations managed to go higher.”

MG: “Nothing, would be my immediate reaction. For an investor like CDC, who have been in the market for decades, we’ve seen the good and the bad. But if I was pushed to highlight something, then the extent of the changing political landscape in South Africa has been eye-raising. There is now a stronger candidate in the Treasury to provide a bulwark to Zuma’s power.”

What’s the biggest challenge in 2017?
JR: “The biggest challenge for GPs in 2017 will be to find attractively priced deals in today’s environment with high geopolitical and economic uncertainty, high asset prices and low growth.”

MG: “Deploying dry powder and delivering exits. Same old, same old.”

RC: “Finding attractive investments and appropriate structures for them. We have taken to setting up funds that allow us to compound capital in regions which we think offer opportunity.”

AW: “Can Private Equity maintain that discipline? Do GPs eventually succumb to the ‘lower for longer’ (low growth, low interest rates) train of thinking and begin to rationalise paying record purchase price multiples for new investments? Does this come at the exact wrong time?”

NR: “Underwriting new investments and understanding that some kind of economic pullback is very likely in the first three years of a hold period.”

Which are the most promising regions and strategies in 2017 and why?
RC: “From a private equity fund perspective we continue to favour the US where the markets are deep and the ecosystem is supportive. We will be looking for sector specific managers there.”

AW: “I think the US continues to offer an attractive risk-adjusted return relative to other geographies. However, given the strength of the US dollar relative to other currencies, long-term investors might look to allocate more to European and even Asian funds as a means of diversification.”

JR: “It is fascinating to see the rapid innovation pace in the IT/tech sector (broadly defined). What is happening in that sector will have a tremendous impact on how and what we produce, consume and live in the future.”

MG: “The obvious answer is that the growth in non-oil producing countries will continue. But, more importantly, I would say that irrespective of macroeconomic trends in country X or country Y there will always be strong micro-economic stories, which private equity can find. Even among economic gloom in countries like Zimbabwe there are companies that have succeeded. Good private equity investors will use their local knowledge and networks to find those growth stories.”

What’s your one piece of advice for GPs?
NR: “Move to fees on invested capital; it will differentiate you among your peers, can be economically neutral, and will help you mitigate the J-curve.”

AW: “Transparency! Take a longer term view of their relationship and partnership with LPs. GPs are increasingly becoming more aggressive around fund economics, sacrificing long-term relationships for short-term financial gain. Additionally, GPs should address succession issues now. GPs who fail to transition economics and ownership to younger generations are doomed to fail.”

JR: “Be extremely disciplined and selective and focus on the sectors you know best!”

MG: “They have to challenge themselves on net returns as much as they put emphasis on delivering gross IRR performance. This is about costs they can control, versus currencies they can’t.”

RC: “Remember LPs want a partnership and that short-term greed can destroy a long-term relationship.”