Hitting the sweet spot of private equity

Private equity can provide investors with uncorrelated and compelling returns and diversification benefits.  This has clearly been noticed by the highly successful Future Fund which has almost 15% of its portfolio exposed to this asset class. We discussed some of the opportunities and challenges in private equity today with Fred Pollock, MD at US-based Grosvenor Capital Management, which together with its affiliates manages in excess of US$52billion in assets.

One challenge we discussed is the issue of more capital chasing fewer deals. Fred tells us: “you need to be that much more selective about who you work with and the type of companies that you target. We found a lot of success targeting, for example, middle market companies, so those with revenues between $100 and $500 million”. Watch or read more below to learn about an exciting asset class that is becoming easier to invest in.

Edited transcript

I think one of the biggest challenges for people investing in the space is if you're outside of the institutional investor class, meaning you don't have billions of dollars to deploy in a diversified private equity programme, it's hard to build a good one because you don't have the depth, breadth, and economies of scale on a platform to find the right opportunities, get the appropriate diversification, both across vintages as well as managers, and to be able to do that, you need to find a partner who can help you construct such a portfolio, particularly for retail investors or smaller individual investors, that's a real challenge to be able to access those things in that way.

There is no question that multiples in the market are at certainly historic highs, even versus 2006 and 2007, in certain spaces. Some of that's driven by growth, meaning it's that the companies that people are investing in are high growth companies that traditionally were public in previous cycles but now are private, so it's driving some of the multiple expansion, meaning the type of companies higher quality. But some of it, also, is that interest rates are low, and that people are funding and paying more for those companies.

What we found, it just means you need to be that much more selective about who you work with and the type of companies that you target. We found a lot of success targeting, for example, middle market companies, so those with revenues between $100 and $500 million, as opposed to the largest companies or the largest buyout deals where there's a tendency for them to become more efficient and less an investment opportunity for those participating.

I think that every asset class, and whether that's public or private, is negatively affected by rising rates if you aren't responsive and thoughtful about entering into those investments, anticipating those conditions. So when we look at private equity opportunities today, we're factoring in those rate increases, and so we're looking for conservative capital structures, high cash flows, places where the growth and opportunity is separate and apart from a sheer exercise of discounting back future cash flows at low rates, and trying to avoid things that are interest rate sensitive, in particular, during this environment.

So I think it's the people who will react to that and anticipate that challenge I think will do fine, and those people who don't, that's a little bit what separates the top managers from the poorest managers.

Want to get access to Private Equity?

The Pengana Private Equity Trust will provide investors with exposure to a diversified portfolio of private equity with a select allocation to private credit and opportunistic investments. The Trust is the first of its kind in Australia, and provides an opportunity for Australian investors to gain access to a professionally managed and globally diversified portfolio of private equity funds and direct private equity investments, with daily liquidity, through a single ASX trade. Find out more