Should GPs diversify or remain specialised
There has been a trend over the past decade for GPs to change, adapt and ultimately to grow. Whether that is to go multi strategy or to diversify within private equity, only a handful of private equity houses have stuck to their core and original focus. Others have morphed into general asset managers such as KKR and Blackstone adding credit, real estate, infrastructure and much more to their original PE focus. Some of these ‘add-ons’ now even exceed the AUM in private equity.
Panellists at unquote’s inaugural private equity conference discussed the merits of both changing as well as staying the same.
Most would agree that LPs are conservative by nature, and like GPs to stick to their knitting. Francesco Di Valmarana from Pantheon echoed the sentiment saying that it was his firm’s natural tendency to like funds which are doing one thing and 100% incentivised to do that, with very few external constraints or motivations.
“We have seen platforms diversify – within the asset class and across - and in certain instances, it makes perfect sense and in others we scratch our heads and wonder what the thinking was, and don’t follow them,” di Valmarana added.
As a private equity firm focussed on one asset class for 30 years, BC Partners’ Charlie Bott said they had received many approaches over the years to diversify into different products but only recently decided to, with the launch of private credit in February 2017 led by Ted Goldthorpe from Apollo and a real estate strategy in May 2018 led by Stéphane Theuriau.
“We have desisted and resisted for many years because when you diversify, you need to take into account a firm’s culture and how you manage the new complexities or else LPs will understandably get concerned that you are taking your eye off the ball,” said Bott. “A Private equity firm is already difficult to manage for all the obvious reason but then when you layer onto a PE firm a credit firm and a real estate firm, the management challenge becomes exponential. It is much easier to manage one firm with one product than one firm with multiple assets.”
Di Valmarana said that a key reason for not re-upping with a GP is a loss of focus: “If we see steady expansion into different areas, then that is one conversation, but what we don’t like to see is mushrooms sprouting across the firm, which inevitably takes a lot of time to manage and causes you to take your eye off the ball.”
The panellists discussed the nuances of the LP/GP relationship with Shani Zindel from Livingbridge saying that what LPs thought did inform their strategy to an extent, coupled with their own growth ambitions.
“In 2007, the market viewed us as an emerging manager, but by 2012 our fundraising was heavily oversubscribed. We couldn’t understand why this wasn’t seen as a good thing - what business turns away their clients? We saw growing interest by LPs in investing in smaller UK companies, we had heritage in this market and believed we could provide such opportunities for our LPs so in this way we were informed by our them,” she said referring to Livingbridge's launch of a small-cap fund.
Di Valmarana admitted that though he did get asked his opinion in off the record conversations by the funds with whom they are the closest, GPs who constantly ask LPs what they should do send the wrong message.
Ultimately the pull to diversify, be it within your asset class or across multiple platforms is strong, the panellists concurred. Indeed, if GPs only ever did what LPs wanted them to do, the industry would have much smaller funds than there are today, and certainly not enough to satisfy demand, said BC Partners’ Bott.
Frans Tieleman from Eurazeo said diversification ultimately makes your firm stronger and gives you different reasons to speak to companies and LPs, building up your network and your firm, citing their recent merger with Idinvest and the acquisition of Eurazeo PME.
“We have a venture team at Idinvest who are going to help us build up our companies and make them digital. We also bought a small & mid cap team in France - Eurazeo PME - who bring with them a depth of relationship in an ecosystem of companies that our original core team could eventually buy,” he said.
Private Equity is an entrepreneurial industry and entrepreneurs want to grow their business, said Livingbridge’s Zindel. “The obvious response is to raise bigger and bigger funds and do bigger deals which is an entirely valid strategy, or you diversify in other ways,” she said.
Incentivising the next generation is also key, most panellists agreed.
“[When I joined the industry] there were many firms that kept doing the same thing over many years but eventually you atrophy as you don’t build succession if you don’t grow so you need to develop a strategy and own a vision,” explained Zindel.
Having multiple asset classes also means you can ride out the storm if the world is crashing down around one, said BC’s Charlie Bott, adding that diversifying ultimately makes you a more secure business.
What’s more, there are large investors such as sovereign wealth funds who offer enormous amounts of capital to GPs that can spread it across asset classes, so if you are a single product person you could end up being disadvantaged in this regard, concluded Bott.