The allure of private equity remains high, but asset owners with little experience in the sector should consider how best to pick general partners and co-investors and be wary of going it alone, warned Thailand's largest pension fund and a Bangkok-based family office at AsianInvestor’s Thailand Global Investment Forum in Bangkok last week.
The warning of the difficulties of successful private equity investing come at a time when asset owners continue to plough large sums of capital into private equity funds. Alternatives data provider Preqin's latest 'Private Equity in Emerging Markets' report, released in May stated that emerging market PE funds had seen assets under management rise 33% in 2017, while the overall value of total deals rose 17%, and venture capital deal volume rising 26% in Asia.
Teerapong Ninvoraskul, deputy chief investment officer and head of private market investment at Thailand's Government Pension Fund (GPF), said the long-term nature of alternatives such as private equity fit well with his institution’s investment horizons. About 4% of GPF’s assets under management of Bt843.16 billion ($25.52 billion) were invested into private equity as of December 2017.
However, while private equity returns are consistently better than those from listed, Teerapong told the audience, they have fallen a little over the past decade, to 3% to 4% above public markets from 5% to 6%.
The best advice for budding PE investors is simple, he noted: you need to build your experience carefully or invest into fund managers that possess it. Even GPF, one of Thailand’s most experienced private equity investors, uses outside experts, he said.
“Mid cap [private equity investing] is very difficult to access, so we would maybe want to outsource this to fund-of-fund managers,” Teerapong noted. “They have the marketing capability to reach for you. Plus data and information in the private market can be very difficult to obtain, and it’s costly to set up the resources to access it.”
THE COST OF PITFALLS
“It’s much more costly to get [PE investing] wrong," he warned, because the diversity of returns between the best and worst performers is much wider than among public market managers.
Research bears this out. A paper by the California State University in October 2017 noted that the difference between top- and bottom-quartile returns of private equity funds has averaged around 19 percentage points between 1991 and 2011. This makes it very important for institutional investors to “assess a [private equity] partnership’s strategy, talents, experience, and even how various partners interact with one another”, according to the report.
Questions have been raised about the appeal of PE funds with recent or new vintages, given that company valuations today are much higher than a few years ago. However, Teerapong said guessing the right vintages to go for was effectively an attempt to predict the market – an almost impossible notion, given the long lives of private equity funds.
Instead he suggested a different approach: “It’s better to tilt a [private equity] portfolio a little bit so that instead of each year you invest $100 million, perhaps you reduce in [what you suspect could be] a bad-vintage year to 70% to 80% of that.”
Teerapong said that institutional investors can begin by using investment consultants, to help secure good private equity partners, given how different the asset class is from public-market investment.
“When I first did this seven years ago,” he noted, “it was difficult to work out who were the consultants, who were managers, who were multi-asset managers. All had different terminology [they used] to call themselves. A consultant can get you started in a good way.”
Others also favour the use of consultants. Sailesh Purswani, president of Thai Martin Group, a Bangkok-based private family office, said partnering with consultants who “have to bring some skin into the game is where we see a clear conversion; your equity converts to something”. Speaking on the same panel as Teerapong, he also said it was best to use consultants specialised in certain fields.
DIRECT INVESTMENT DIFFICULTIES
Some institutional investors may believe it is simple to make PE-style investments themselves, but they could find the process far harder than they expect, said Teerapong.
“One mistake a lot of institutional investors make … is to go in directly without having the proper infrastructure of governing system to support that kind of thing,” he said. “It looks easy to cut out the middlemen and do it yourself, but [if you do] you are probably going to end up with a concentrated portfolio.”
Each investment requires a lot of internal resources to research, execute and then manage, he noted, but asset owners often lack sufficient patience.
An asset owner may wish to do three, four or five direct deals a year and ramp up their exposure quickly, said Teerapong. But it takes time to build a PE allocation, so investors can end up with a concentrated portfolio, he noted, “and that is very dangerous”.
Moreover, getting direct private equity investing right depends heavily on having good business partners and a strong understanding of the underlying investment, noted Purswani.
“If you were playing in this field 15 years ago, it relied on gut feelings and relationships, and there were only a few companies here and there [competing with us],” he told the audience. “Fast forward to the last three years, and there are more brains, more money and more ways of investing than 15 years ago, and today the offers totally different issues for family offices.”
For many years Thai Martin Group focused on turning around ailing local businesses and then selling out. He noted one example where the family office bought into a dairy company, before eventually partnering Swiss food conglomerate Nestle and then selling the business.
These days, Thai Martin is putting a big focus on technology and eyeing major global trends such as big data and the internet of things, Purswani said.
Of course, moving into new, unfamiliar areas makes it particularly vital for investors to assess and team up with management teams they can relate to and trust, he noted. “If you don’t have the right people or partners, then your investments into technology won’t be successful.”
And how can investors reduce the risk of conducting due diligence and research? “Get a good lawyer,” was Purswani’s pithy reply.