LP interview: SL Capital's Graeme Gunn

Anneken Tappe: The Nordics are considered a relatively safe haven for investments in Europe, because they are less exposed to the struggling periphery of the Eurozone. How has the Eurozone crisis impacted your private equity allocation?

Graeme Gunn: If you look at SL Capital, historically, 90% of our capital is invested in Europe. Given this experience, we believe that Europe has not suddenly become an unattractive source for private equity investing. We have been geographically agnostic in Europe, looking for those managers who have an industrial approach to investment so they can source and execute attractive investments at any point in the cycle. Of course when you look around there is a level of uncertainty on the European macro level, but in general we believe that this should be a good period to invest in the region - you can be contrarian.

We have invested very lightly in Southern Europe, because the reality is that it has been tough to find good fund managers in that region for the past decade. Private equity needs a liberal and flexible labour market, as you have in the Nordics, the UK and in part in Benelux and Germany. Southern Europe does not have this and faces an uphill struggle to gain credibility, but there are some excellent businesses in the region. We have co-invested in Italian and Spanish companies that have done very well. In the end, we have always been cautious in those markets that are now struggling so we are not spending time dramatically changing our business model for the current environment. With the mainstream, we have recently been looking a lot at turnaround equity funds and energy is an area where we have a lot of expertise and where we think there will be a five year supercycle. We have also moved further east, investing in funds and co-investing in Poland.

unquote" talks to SL Capital's Graeme Gunn about the eurozone crisis and co-investment strategies

AT: What kind of issues do you see with investments in the Nordics?

GG: One concern is that it is so easy for small- and mid-cap fund managers to raise capital at will. There is a lot of capital across the market, so you need to choose your partners well. 85% of Nordic deals are invested in by local players and we always seek the funds that can demonstrate proprietary dealflow. In Finland the local payers capture almost 100%, so overall the key is to back experienced local teams.

Sweden is not immune to European woes, given it has a significant export focus. Finland is less impacted but is has the Euro, and Norway is generally just a good place to be right now given the economy and success of the oil industry. In Denmark, the environment is not positive for private equity. The government has regulated more and there are quite a few managers and the deal flow is hard to see, so it is the market we struggle with the most in the region.

AT: It seems like there is demand for European assets in the US again, what are your thoughts on that?

GG: European assets are generally quite a tough sell right now. But those investors who have been in the markets over the long term can and will still invest. So yes, in a sense, there is an appetite, but it is for the contrarians who can take a 5-10 year view. We are raising a European-focused fund-of-funds for small and medium vehicles right now, and we have had commitments from our US and other global clients.

There is continued demand for certain private equity funds and it is a lot clearer these days who is getting traction in terms of fundraising. There is certainly a polarisation in who can raise capital. SL Capital is interested in energy and we are see a supercycle over the next five years, and we are keen on turnaround in Europe so that is what we are looking at in addition to the mainstream.

AT: What are the most important criteria when choosing a fund manager in the Nordics and have these factors changed in the past years?

GG: No, it hasn't really changed. You find private equity teams in the region from industrial backgrounds with a focus on building local champions and expanding them across the Nordic's. Buy-and-build is a big component of the success there, as is this combination of industrial and financial expertise. Nordic companies have a focus on exporting, which is great, as the region is small on a global basis. They also have the right supply of management talent there, and can find people with global experience and strong local relationships. Relationships are a big thing in the region, because success is not necessarily measured in financial terms in society. There has historically been a healthy interaction between the company, employees, unions and the private equity firms that has been powerful. However, today there are a number of fronts where there has been a backlash against private equity in terms of taxation of and leverage. We do not expect this to materially impact the returns from the region.

AT: The implementation dates for new European regulation are coming closer. How well prepared are you for the new constraints?

GG: The AIFMD is certainly something we are working hard to understand and comply with. We have outsourced our day-to-day back office administration since 1999 and are regulated by the FSA and SEC, so we already meet many of the new obligations. Understandably, we need to see the final regulations in order to best understand what our full obligations will be under AIFMD.

Since 1999, we have raised 15 funds-of-funds, however we are aware that it will be tougher and more complex for us to run our business in the future, so we have hired specific resource to help us deal with this. For our pension fund clients we are providing their whole private equity solution, and we will take the burden from them in dealing with these regulations. Still, undoubtedly it will cost more to do business in the future and we will have to absorb that.

AT: What are your thoughts on investment incentives, such as early-bird discounts, but also including co-investment opportunities? Are incentives more or less important in an economic climate like the current one, where deal quality is so important?

GG: These Incentives can never offset the quality of the managers. That does not mean we do not take advantage of opportunities, though.
A mediocre fund with average performance does not get more attractive through incentives. We are looking for the best value for our clients and always push hard on fees and firms that accept the market norms. In general, SL Capital tries to be a first-close investor and if there are discounts for early commitments that is one thing. But these discounts do not make a fundraising successful.

AT: Some have pointed out that co-investments can be really strenuous and work-intense, yet SL engages in it.

GG: Co-investing has been in our DNA for years and 30% of our capital goes into direct co-investments alongside our managers. For that to work and to deliver outperformance, long-term relationships with managers are crucial and we have the necessary resources in place in terms of staffing to ensure these relationships generate strong dealflow. The managers want to see that you can deliver and commit on a transaction and that is where we have been successful.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• LPs
• Interview