Wellcome CIO urges ‘Darwinian evolution’

Excessive deal fees, succession issues and the ‘Wimbledonisation’ of the LP base are problems European private equity must solve, according to Danny Truell.

Danny Truell, the outspoken chief investment officer of £13 billion (€14 billion; $21 billion) UK charity Wellcome Trust, today urged the private equity industry to rethink some of its practices and strategies.

In a speech at the British Venture Capital Association Summit in London, Truell said that fund models must be re-examined, deal fees abolished or reduced and investment theses altered. “We need a Darwinian evolution,” he said.

He began his remarks by noting he was particularly disappointed with the slow speed at which general partners have drawn down capital since 2008, ostensibly missing out on bargain assets.

“If our private equity firms won’t do it for us, we’ll do it ourselves,” he said, referencing the institutional investor’s 25-strong, in-house investment team. He noted this week’s agreement with pharmaceutical giant GlaxoSmithKline to develop a £170 million biotech park in Hertfordshire. 

If our private equity firms won’t do it for us, we’ll do it ourselves.

Danny Truell

The threat echoes comments recently made by the C$70 billion (€46 billion; $68 billion) Alberta Investment Management, which told sister publication Private Equity International that it aimed to create a direct investment team. Unlike Truell, however, Alberta’s aim to go direct was largely in response to what it perceived as the higher cost of having money managed externally given various fee structures, the pension said.

While not the main point behind Truell’s warning that his team could – and often does – bypass GPs, he too noted displeasure over transaction fees in his speech today.  “We are quite happy to pay people for results”, he said, but added deal fees should have lesser prominence.

Truell also called attention to legacy portfolio issues stemming from the frothy deals agreed in the prior boom cycle, as well as the “plethora of ‘subscale’ troubled private equity firms” in Europe that are struggling with succession issues.

He told the audience that in these succession problem situations, one could “choose the more explosive route as Jon Moulton did” [in resigning from Alchemy Partners over a strategy spat and advising LPs to withdraw support for the remaining management team], or LPs and GPs can try to work together on solutions.

Another item he found troubling was what he dubbed the “Wimbledonisation” of European funds’ limited partner base, in that they were populated primarily by – and, in his view, overly reliant on – foreign “players”, or sources of capital.

“The fact is, the private equity community has not been as successful as it should be in attracting indigenous investors,” he told the audience.

While he suggested GPs look for more domestic LPs, he simultaneously encouraged them to look to emerging markets for deal opportunities.  “European private equity is too Eurocentric,” Truell said.

Growth 20 years from now would be explosive in places like the Democratic Republic of Congo, where presently the country “doesn’t have a lot of roads… I urge you to get down there”, he said.