In fact, investors and fund managers at Opal Financial Group’s recent Institutional Investors’ Congress in Vienna said that focusing attention away from leveraged buyout (LBO) could open up attractive opportunities in areas like venture capital and debt, mid-market deals, distressed companies and secondary funds.
Stewart Hay, investment director at Standard Life Investments’ fund of funds subsidiary SL Capital Partners, struck a low-key note, pointing to “anecdotal evidence” that the larger buyout groups have been having trouble with the kind of large fundraisings that were common before last summer. The credit contraction had also coincided with the end of the biggest institutional investors’ latest round of increases in their allocations to the asset class.
“For example, CalPERS have gone from 6 per cent up to 10 per cent,” he observed. “But they are through with that and pretty much fully committed now.”
But other panellists revealed that there are plenty of smaller investors who are a long way from meeting their strategic allocations. Velida Jahic, CIO at the County Council of Gävelborg in Sweden, conceded that her compatriots had, on aggregate, gone from about 3 to 8 per cent in private equity over the last five years. Her fund, however, was still at 3 per cent and intended to move to 7 per cent into the asset class over the next 3-5 years.
“We are likely to see returns correct downwards, back to historical levels – but that is not a bad thing,” she said. “As long-term investors, pension funds should take advantage of the liquidity premiums that private equity offers.”
Paul Matthews, corporate treasurer at the City of London Corporation, also stressed the opportunities for long-term investors: with about 3 per cent in private equity at the moment, the Corporation’s investment fund is seeking to diversify out of the direct property it holds in the City and West End into a number of more mainstream asset classes, and “will definitely be increasing the private equity allocation”.
Although LBO deals may be difficult to finance in the newly tight credit environment, that is allowing strategies long under the LBO shadow to return to the light.
Venture capital, an underperformer for some time, should return to form, particularly for investors who have managed to get access to top-quartile managers, said Erin Sarret, a director at Wilshire Private Markets Group.
“We’ll see a pull-back from buyout into venture, and the new venture debt strategies,” she predicted. “It won’t be the bubble we saw in 2000, but there will be more investment.”
Furthermore, the lack of dealflow at LBO level is forcing more competition in mid-markets, with greater value therefore being added beyond simple financial engineering. “We are seeing a lot more emphasis on growth, and making money the old-fashioned ways,” observed Ms Sarret. “The focus is no longer purely on IRR.”
The hangover from the credit binge is also likely to generate bargains in the secondaries market, according to Mercer’s Brendan O’Brien – although many investors will find themselves on the wrong end of that trade.
MS
