Widespread equity market turmoil prompts investors to consider benefits of PE
By Paul Mackintosh - 06/07/12
There are several conclusions that can be drawn from the upheavals in major private equity groups over the past few weeks, with BlackRock, Inc. acquiring the US$7.5 billion AUM business of Swiss Re Private Equity Partners AG from parent Swiss Re, HarbourVest picking up the $1.4 billion portfolio of Conversus Capital at a reported 14% discount to NAV, and 3i Group announcing the closure of six offices – including Shanghai and Hong Kong – and redundancies for one third of its staff. Apart from the simple one that we are in disturbed and disturbing times.
One is that assets are still up for grabs. According to the latest Coller Capital PE Barometer, more global LPs plan to use the secondary market – as buyers or sellers – than ever in its entire history. Regulatory pressure and moves to shed non-core divisions are adding to situations like Conversus’. Opportunities abound for portfolio reconstruction on the fly.
Another is that listed private equity is pretty much dead in the water as an operational model. The recent carnage in the equity markets has wrought havoc among new listings and IPOs, let alone opportunities for new capital-raising from public markets investors. The recent crop of big-name US firms to list have delivered mediocre results to investors and attracted recurrent complaints that their IPOs are simply cash-out vehicles for group heads. Euronext-listed Conversus has been assessing exit options for a couple of years, and both it and 3i have seen their shares trade at deep discounts to NAV. With performance like this, investor scepticism seems all too justified.
Yet the fault may not lie with the listed PE model alone. Both the recent IPO drought and the IPOs that did come to market, Facebook above all, have fuelled further scepticism about the cult of equity per se. Malaysia’s recent standout performance as an IPO venue seems all too transparently driven by politics, in a collective defiance of economic realities which the country and its financial advisors may have to pay for in years to come. Elsewhere, IPOs and stock prices languish, even in Asia’s supposed crisis-resistant growth markets. Is it any wonder then that, as Matthew Botein, MD and Head of BlackRock Alternative Investors, said, “in an environment where yields are low and volatility is high, clients around the world are embracing alternatives that offer higher return potential and the ability to mitigate risk”? The Coller Barometer states that 32% of European LPs are looking to increase their PE exposure. So the final conclusion could be good for PE but bad for listed markets as a whole – institutional investors have bought the message on alternatives, and are turning to them in the face of an ever-bleaker equity environment. Fingers crossed that the asset class can truly deliver.