In the low growth, low rate environment of the past decade, it has been increasingly difficult for investors of all stripes to generate attractive levels of return.
One way that larger investors – such as institutions and pension funds – have been generating returns is through private equity and is something that could play a greater role in retail investment portfolios.
This is because institutions and pension funds recognise that private equity managers are able to pick up companies earlier in their development and therefore capture more upside.
“If you look at the big institutional investors, pension funds, insurance companies, they’ve been active participants of private equity and have been increasing their allocations,” explained Helen Steers (pictured), manager of the £1.6bn Pantheon International investment trust.
She added: “A lot of the growth these days is happening before companies go public, indeed they may decide not to go public at all and stay a private company.”
“The number of private companies has been increasing, while the number of public companies has been decreasing pretty steadily for the last 20 years.
“It’s not just because they can get the capital now from private markets which is probably different from 10 or 15 years ago, but also because companies want an active investor that’s aligned with them and will provide expertise and skills to help them grow the business.”
Heading into the current crisis, while most investors were caught off guard by the unprecedented disruption to the economy caused by coronavirus, Steers said private equity managers were generally well-prepared because they were anticipating a downturn after a 10-year bull run.
“If you look at the behaviour of many private equity managers towards the end of last year, they were doing a lot to prepare their portfolio companies for a downturn,” Steers explained.
“They were making sure they’ve got the right capital structure and taking advantage of a loose debt market by pushing out maturities and getting the best terms and conditions.”
Steers said another reason private equity held up well was because of the large proportion of private equity investment that has taken place in niche industry sectors which are doing well amidst the Covid-19 crisis.
“Private equity has financed a lot of the remote working technology, communications infrastructure that helps video conferencing, and pharma and biotech firms in the healthcare sector,” she said.
Now that the world is entering a post-Covid-19 world where the possibility of a low or negative growth environment becomes more likely, Steers said private equity returns will be able to capture pockets of growth.
“Even in a difficult growth environment, I think private equity is particularly well suited to grow, because of the in-house expertise they've got and the fact that they don't have to build globally diversified portfolios,” she said.
“They invest in very specific niche areas where they've got a playbook, they've seen deals before in these areas, and are able to spot the right opportunities.”
Steers added: “I think private equity will still continue to find these opportunities and be ahead of the curve of the next trends, whether its demographic or secular.”
Music streaming service Spotify was one such company highlighted by Steers that Pantheon International invested in – eight years before it listed on the NYSE for a $30bn valuation. The trust took part in the growth of the global music streaming technology platform via funds managed by technology investors Wellington Partners and Northzone.
Another early investment Pantheon International made was in Worldpay, a former division of the Royal Bank of Scotland which was spun off in 2010 to private equity firms Advent International and Bain Capital who bought it for £2bn before its IPO in 2015 and eventual acquisition by Vantiv for £9.1bn.
“Worldpay was part of the trend towards more sophisticated payment technology and a good example of where private equity saw an opportunity,” Steers said.
“It was a distressed seller, it was a sleepy division, and the managers massively invested into it with a lot of experience in the subsector and brought in their expertise and networks.”
Private equity is often considered as a relatively opaque asset class, but while it may seem like that on the outside, Steers said “private equity managers get huge amounts of information on the underlying portfolio companies”.
“Obviously they sit on the board, but on top of that they frequently hire people to boost the management team, supply experts to help companies with procurement, or going to market strategies, etc,” she explained.
“These private equity managers are often sector specialists and they’ll be gathering information which I think is a lot more current, detailed and deeper than you would get if you were a public market investor.”
Steers said because of Pantheon’s long history in the space – having been founded in 1987 – the asset has managed to build up relationships over a long period of time, gaining the trust of private equity managers.
“They tell us things about their portfolio that aren’t always very well known, and we can use that information in the secondary market when making a purchase of a fund,” she said.
“We will know things that aren’t necessarily in the last quarterly valuation and we can use that information to price that position and often get a very good deal.”
Performance of trust vs sector over 5yrs
Source: FE Analytics
The Pantheon International Investment trust has made a 69.79 per cent return over five years versus 15.74 per cent from the IT Private Equity sector. The trust is currently trading at a discount to net asset value (NAV) of 24.6 per cent, it is not geared and has ongoing charges of 1.23 per cent.