Standing firm

Over the past 12 months, the private equity industry froze. Almost no deals were done, while market sentiment confirmed the gloomy verdict of the data. According to Pantheon's Helen Steers, this is due to two factors: a lack of visibility of earnings and developments; and the price expectation gap between buyers and vendors, with some sellers still sticking to 2007 valuations.

However, Steers asserts that it would be wrong to read too much into this dearth of transaction activity. "The conspicuous lack of deals described in various activity charts gives an erroneous image of the situation among private equity funds," she argues. "If you look deeper, some GPs are actually taking advantage of the environment by making add-on investments to their portfolio companies."

She goes on to suggest that those GPs that survive the downturn successfully will come out even stronger - and then continue to prosper. "They will pick up the best opportunities, see the best deal flow, obtain the best bank relations and recruit the best people."

Stay focused

The well-publicised issues of some mega-funds, coupled with questions around the validity of the buyout model, have resulted in speculation as to whether or not LPs will change their allocations and move towards alternatives such as distressed debt or mezzanine.

According to Steers, Pantheon has no intention of changing their investment focus, though this is not surprising given that this fund-of-funds' sweetspot has always been the mid- to large-cap market, steering away from mega-funds. To explain it purely in these terms, though, is to underestimate the firm's commitment to their strategy. Despite the hiatus in the fundraising market, Pantheon has continued to invest this year, committing to one small buyout fund in Continental Europe, a similar vehicle in the UK and a couple of venture funds.

Pantheon aims to cover all institutional-quality European funds that raise over EUR100m and estimates it has a coverage ratio of about 90%. Although the investor has backed new groups, mostly in the mid-market, this does not mean that every fund stands an equal chance. "Currently new outfits without experience stand only a very slight chance of raising funds," Steers admits, adding: "Spin-offs from successful GPs on the other hand are a different story. These opportunities are very interesting."

The pendulum has shifted, so what?

The idea that the pendulum has shifted in favour of LPs has been vastly discussed and reported. Yet, with few funds going to market, it is hard to see this new bargaining power in practice. As Steers points out, as a fund investor you cannot go back and change the terms and conditions of existing fund documents except under extreme conditions.

Additionally, as she reminds us, terms and conditions are more than just management fees and carry: "Terms are a whole basket of things: transaction fees, key-man clauses, distribution waterfall - to name a few. LPs have obtained a bit more negotiating power, but this is a long-term industry and we have to be fair." Being fair, she explains, means adhering to the fundamental principle of private equity, namely alignment of interest - between investors in the fund, fund managers and investee companies.

One thing that will affect fees, though perhaps not in the way we might predict today, is the looming industry shake-out generated by vast dispersion of returns. This is likely to separate the wheat from the chaff, giving room for the very best to maintain existing fee levels. Steers comments: "What's the point of paying lower fees for lower returns?"

Good business

One area where Pantheon is willing to use its extra negotiating power is in the area of responsible investment. It was the first fund-of-funds to sign up to the UN Principles of Responsible Investing (UNPRI), while the team has also worked with the committee to develop guidelines for LPs, which are now available on the UNPRI website. "It is a one-way street," Steers says of responsible investing, continuing: "It makes sound business sense to do this, so eventually we expect everyone to follow."

Already, Pantheon has introduced it as a standing item on the agenda of advisory boards they sit on, and it is a requirement in any due diligence they do on new and existing managers. "What we also find is that our investors are increasingly asking for reports on responsible investments," Steers says. And to pay tribute to the North, Nordic investors are perhaps the most eager.

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

• Topics
• Investments
• Nordics