18 November 2015

Summary of SuperInvestor 2015 Main Conference Day 1

The SuperInvestor 2015 main conference opened today, with the focus on how GPs and LPs should be responding to the challenges of the current environment. Throughout the speeches and panels of the day, there were repeated calls for the industry to reflect on past lessons and refocus on certain fundamentals: investment analysis, people and relationships.

The private equity industry is facing a unique macroeconomic environment. According to Andrew Sillitoe (Co-CEO, Apax), a rare coincidence of modest growth, low interest rates and low inflation is driving high valuations, which, from past experience, suggests a risk of underperforming vintages. Under such conditions, the challenge for players will be how to find good investments. He was confident that the majority of the industry would be able to exceed benchmark performance, but the much tougher task will be to continue to deliver traditional private equity returns in this context.

Taking a more proactive and differentiated approach to finding value was acknowledged as a key driver for making good investments. Narrowly focusing on certain criteria (eg, IRR), or on linear analysis (eg, extrapolating historical performance), should be put aside in favour of identifying investment opportunities that present multiple levers – a feature that is clearly highly valued by Jane Rowe (Senior Vice President, Teachers' Private Capital, Ontario Teachers' Pension Plan). In addition, the increasing emphasis of the industry on IRR as a decision-making tool may also lead to a shortening of investment holding periods, which can then result in increased reinvestment risk, according to Jim Coulter (CEO & Founding Partner, TPG).

Guy Hands (Chairman & Founder, Terra Firma Capital Partners) and Rob Lucas (Managing Partner, CVC Capital Partners) shared some closely corresponding views on the importance of hiring the right people and incentivising them in the right way. The abilities to make buying decisions, to lead and to persuade others to come along were listed as essential – these being the qualities that drove the private equity industry in its early days. The catch, however, is that as private equity firms have grown, it has become increasingly difficult to foster and maintain such entrepreneurial spirit. To this end, Mr Hands proposes that incentive models should be revisited – he is hoping that lower cash compensation and higher participation in upside will do more to satisfy go-getting managers and provide that 'holy grail' of private equity: Alpha. As Mr Lucas so succinctly summed up – this is a people business; capital is a commodity.

King & Wood Mallesons partners, Michael Halford and Nathalie Duguay, spoke about some key developments in terms, structures and regulatory developments. In particular, they noted that LPs are keener than ever for co-investment opportunities. Indeed, Mr Coulter earlier acknowledged that the vast majority of investors he had spoken to in the past year were either co-investing or interested in co-investing. Managers, however, need to tread carefully when negotiating co-investment opportunities with investors, and Mr Halford noted that some were relying on co-investment policies setting out terms for priority.

As co-investment has become more commonplace, so direct investment is becoming increasingly popular. Mr Lucas reminded us, however, that it is important to keep in mind the value that GPs bring to investments. The obvious advantage of investing through a GP is the diversification of an investment portfolio relative to direct investments. In addition, LPs are also more insulated from some tough, unpopular decisions (and the accompanying scrutiny) that can be required to protect an investment and build value.

It is probably also an appropriate time to look beyond our world and reflect on our relationship with the broader public. Private equity has matured and become a significant industry in itself – delivering highly competitive returns to many investors. Despite this, the industry continues to face a multitude of issues (taxation, regulation, etc), which, in large part, are driven by poor public relations – in short, we have a brand problem. In light of these issues, Mr Coulter suggested we would do well to keep our relationship with the public front of mind in the ongoing discussions within the industry.

Related articles: 

Summary of SuperInvestor 2015 Main Conference Day 2

Summary of SuperInvestor 2015 Main Conference Day 3

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