Manager selection has always been a top priority, but getting this right is even more important in challenging and unpredictable markets, so we’ve continued to refine our manager and fund selection process, to ensure that the funds we select continue to deliver strong returns.
Starting with the macro, we are always looking for the right strategy that will be buoyed but is not dependent upon current trends, and then using our proprietary quantitative and qualitative scoring model, we make doubly sure we’re choosing only the very best managers and funds. We’re looking for top quartile performance from managers with a long track record and a clearly defined strategy, who are not operating in a crowded space, and have a distinct specialism or focus.
Selecting the right manager is key to unlocking performance. Statistically speaking, outperformers have a 35% probability of repeating stand-out performance, while non-performers have a 38% probability of underperforming again.[1] Therefore, we proactively seek out these high-performers across all asset classes using our proprietary network and strong industry relationships, gaining access to top-tier managers such as CVC and its recently closed flagship private equity fund, among others.
Since the end of 2022, we have witnessed a more challenging fundraising environment. Many institutional investors have been re-investing only with managers they have existing relationships with and have been cutting back on their allocation to alternatives. This is partly due to the ‘denominator effect’ if they are now over-committed to alternatives due to the other assets in their portfolio decreasing in value.
This has led to many general partners (GPs) actively seeking to diversify their limited partner (LP) investor base, which has played to our advantage by opening up more interaction with bigger GPs such as ICG and CVC. There is a growing realisation from larger managers that private capital from smaller institutional investors is increasingly important as they begin to build their private wealth platforms.
As we enter the second half of the year, volatility and uncertainty are likely to continue, while mega trends like digitisation, the AI revolution and decarbonisation/energy transition will be major drivers. Our focus will be on five key areas:
- In private credit, where debt is still in demand from equity sponsors as banks retreat. Rising interest rates mean better yields, with many deals on a floating rate. Here, we’re looking especially at the more opportunistic credit space offering contractual income but with equity-like upside and shorter dated credit strategies that will benefit from stepping in as a lender with preferred terms to address a specific need.
- In private equity, we will seek out quality managers operating specialist strategies such as take-private deals and complex carve-outs, or growth equity in middle market companies focussed on resilient, defensive sectors.
- In private equity secondaries and co-investments, where private equity exits and distributions remain scarce, and more LPs are seeking liquidity, there are good opportunities for new investors to step in and buy out LPs’ stakes, or to co-invest alongside GPs. This is a growing, innovative sector, especially in a difficult fundraising environment.
- Continuation funds, where key star assets are rolled over into a new fund vehicle, so the hold period can be pushed out to maximise potential returns, are gaining traction. Many of the large private equity managers are seeking to facilitate earlier fund liquidity whilst offering new investors the opportunity to invest as LPs in these continuation vehicles. This is a growing area in the current market, especially where liquidity options are challenged.
- In real assets and infrastructure: a sector with strong tailwinds as governments globally recognise the need to enhance their infrastructure, especially investing in energy transition assets. Here, the inherent contractual nature of the deal structures provides a hedge against inflation: an attractive prospect in this environment.
The pipeline ahead is shaping up nicely and in the next quarter we’ll be offering clients opportunities to invest in a continuation fund for a global specialty (re)insurance business based here in the UK and a pure-play, private equity co-investment fund from a leading global manager, as well as re-opening the BCI Credit Fund to new commitments to play to the increased opportunities in the credit space. Plus, there’s plenty more to come before the end of the year. We look forward to sharing these with you in the coming months.
[1] Based on Pitchbook performance data for all global private equity funds 2008-2019