Finding new PE strategies in today's challenging markets
Brian Chun, Investment Officer at The Leona M. and Harry B. Helmsley Charitable Trust, said private equity had been a great beneficiary of quantitative easing programmes and low interest rates. He added that, while he had previously expected rates to rise, he now believes there would be a longer period of low interest rates than previously thought.
Marcus Simpson, head of Global Private Capital at QIC, agreed, “The large buy-out, high leverage has benefited from low interest rates, as has real-estate and infrastructure investing.” But despite the supportive macro-environment of the past decade, funds are changing their investment strategies. “Ten years ago we were just investing into private equity funds, now we do funds, co-investments, and co-underwritten transactions. We have also made longer-term investments and we do a lot of venture,” Simpson said.
He added that QIC was also being more proactive in terms of its investments. A common thread in deals that had not gone well was that they had been passive, bought in at the end of the process, or been in investments they had no influence over. “It has encouraged us to be more of a co-underwriter. We are now finding deals and bringing them to our managers. Bringing something more than just passive capital was a big learning curve,” he said.
The panel agreed that while finding alpha in some markets was becoming tougher, Asia continued to offer opportunities.
Chun said in the US large capitalisation public long-term investment space, there was not much alpha to extract. “If you look at Asian equities you will see a lot more dispersion in winners and losers, even in the public markets.”
He added that on the private equity for venture side, competition among Chinese or Asian venture-backed companies was very fierce. “If you are invested in the top managers or top performing companies you are going to capture the bulk of those returns,” he said.
KO Chia, Director at Grace Financial, added: “From a global allocation perspective, we are seeing in the more developed markets that leverage has been used substantially to boost returns. But in an Asian context growth is strong in the private equity arena.”
In terms of sectors, Chun said one of the larger themes across his portfolio was currently healthcare and longevity. “If you are really on the cutting edge of backing that next therapeutic drug that gets approved that is going to be a big winner,” he said, although he acknowledged it was high risk.
In terms of diversification, he said he thought about the portfolio in tiers of liquidity. “We think about four tiers of liquidity between safe assets, public liquid, semi-liquid and illiquid. We don’t think about asset classes per se, we think about it from a liquidity standpoint.”
Simpson also likes healthcare, which he said had accounted for around 25% of his returns in the past 14 years. But he added that he preferred healthcare services, such as cancer care centres, as there was less uncertainty compared with drugs that had to go through clinical trials and receive approval.
Chun said one of the major conversations he was having with private equity partners was about the threat posed by disruption. “When they are doing due diligence and underwriting the deals, they really have to take a fresh look at the company and think about what disruptive forces could really change it. There are so many businesses today that can get disrupted and they can get disrupted very quickly,” he said.
He added that investors had to think about how they could add value to the company and defend it if disruption happened sooner than they anticipated. “This is something that a lot of traditional private equity managers are really implementing in their underwriting cases,” he said.
Chia pointed out that technology disruption was also now cutting across different industries: “if you are still thinking of traditional industries you will get flanked by someone else coming into your segment. All the new tools and computational power that is coming through is changing traditional businesses. I am also beginning to see cross-sector disruptions.”
He added that it was important that private equity and venture capital managers thought through the implications of this trend. Simpson agreed, saying that for the past three to four years, they had looked at every business in which they were interested in terms of whether innovation would be a disrupter or an enabler for it.
But despite the challenge of disruption and alpha becoming harder to find in some markets, the panellists agreed that prospects remained bright in Asia for investors with the right strategies.
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