SCM chief: PE may benefit from ‘misleading’ hedge funds

Investors unhappy with hedge funds that failed to deliver on promises may give private equity greater priority in the investment mix, argues Stefan Hepp of Zurich-based SCM Strategic Capital.

Some limited partners feel misled by hedge funds and, within the context of alternative investment portfolio construction, are more likely to be sympathetic to private equity going forward, according to  Stefan Hepp, chief executive of Zurich-based SCM Strategic Capital Management.

“In some cases, LPs are saying they were misled by hedge funds because the product was wrongly labelled as offering low volatility, stable returns, a disconnect from the broader market and illiquidity,” he told sister magazine Private Equity International. “This turned out to be untrue. At least they knew that private equity was long term, illiquid and could be volatile. Private equity put its dangers on the wrapper, hedge funds didn’t.  As a result, I sense something of a shift from hedge funds to private equity.”

Hepp’s view is tempered by his belief that private equity’s battle against economic headwinds will leave casualties in its wake. “Full write-downs will be significantly higher than the loss rates during previous crises,” he said. “If you have deteriorating revenues and you need to refinance your debt in a choosy market environment, you won’t cut it. Many of those portfolio companies that do make it through will deliver returns somewhat lower than their investors would originally have hoped for.”

Private equity put its dangers on the wrapper, hedge funds didn't.

Stefan Hepp

However, Hepp’s prediction of a more favourable outlook for private equity in the coming period is backed up by several of his peers in the Swiss market. These include Alfred Gantner, co-founder and executive chairman of Zug-based alternative assets manager and adviser Partners Group.

“We judge this to be one of the most attractive environments we have seen in over a decade of investing,” Gantner said, who added Partners has more than CHF7 billion (€4.6 billion; $6.5 billion) of un-invested capital “to provide long-term financing to an economy facing a huge deleveraging process”.

While Gantner predicted that as many as 40 percent of GPs might eventually go out of business, he said the best of breed are more highly sought after than ever. “Private equity managers who set themselves apart in terms of performance, stability, risk management, transparency and swift reporting to clients are probably more appreciated now than ever before,” he said.

Hepp and Gantner were among the Swiss private equity professionals interviewed for PEI’s Switzerland report, which will feature in PEI's October 2009 issue.