Q&A: Katharina Lichtner

There is widespread belief that LPs are only likely to back existing fund managers, and even then only after prolonged due diligence and at lower levels than previously. Do you think this belief is warranted?

Yes and no. We expect a flight to established managers in the next fundraising cycle. However, some brand names will find it difficult to raise the next fund - especially if they face succession issues, or lost investment discipline in the last cycle.

In any case, due diligence is likely to take longer. Fewer realisations and portfolio problems will make it much more difficult to evaluate performance and workload issues. Additionally, more time is needed to understand how the changed economics of fee income and smaller-than-expected carry impacts team development.

With a series of interesting spinout teams expected to come to market as well, we anticipate them to be quite successful in raising a fund.

As a result of the downturn in the markets, LPs have been changing their investment strategies with regards to what areas of private equity they are interested in. Has Capital Dynamics changed its strategy, and if so, to what sectors and why?

Capital Dynamics has not changed its strategy. We believe that market timing is particularly difficult in a long-term asset class like private equity and that it is near to impossible to predict which strategies will ultimately be the winners 6-8 years down the road.

Furthermore, in our experience top-tier managers are able to generate attractive returns irrespective of the point we are at in the cycle. Rather than shifting the allocation, we scrutinise how able a manager is to adjust to new market conditions, and try to identify who we believe are the best positioned managers to capture the opportunities in the market for a given strategy.

There has been much talk on secondaries transactions, but less action it seems. What are your experiences of this?

Current NAVs are low and the economic uncertainty drives up secondary market discounts with the result that there are few sellers at the prices buyers are willing to offer. Consequently, the secondary market is relatively quiet at the moment. There is a lot of evaluation of opportunities, but very little being transacted.

However, possible liquidity issues loom once drawdowns start to pick up, which we expect to happen prior to any increase in distributions. As such, we expect the bid-ask spread to narrow and activity to pick up as the economic environment continues to stabilise gradually and liquidity pressures increase.

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