Q&A - Neil Harper

Given the downturn in the markets, would you as an LP do anything differently now going forward? What advice would you give to a first-time investor?

In the medium to long term, I believe the prospects for private equity as an asset class, broadly defined, are strong. I believe the governance challenges associated with the public company construct will lead to a greater share of economic activity in much of the developed world in private ownership, innovation.

The imperative of economic growth globally will lead to an ongoing critical role for venture and growth capital, and so-called "special situations" investing will continue to be a key area of innovation, taking advantage of economic dislocation and capital supply/demand imbalances.

That said, in the near term, several segments of the private equity world will face meaningful challenges, particularly the large and mega cap buyout segments and most strategies that rely heavily on high leverage and low cost debt, as these strategies took advantage of an anomalous credit environment during the past few years.

First-time investors in private equity should take account of this environment in building their programmes. For example, they should start with allocations to currently highly attractive distressed strategies, looking at secondaries rather than primaries as an entry point to gain exposure at attractive prices with more rapid return of capital, and then gradually building diversified exposure to other segments, including buyouts, with a focus on smaller and mid cap strategies.

For us, the answer to the question is to rigourously stick to what we have always done since inception of our programme, and essentially to reaffirm this approach, for example, to favour hands-on, active managers with differentiated skill sets, highly focused on strategies and segments where the capital supply/demand balance is favourable, and where there is a degree of market inefficiency, with funds of appropriate size given the opportunity targeted.

It is also critical for LPs to operate at a scale and scope at which you can find and diligence the best opportunities globally, independent of strategy - buyouts, venture, growth, special situations - and independent of entry point, be it primary, secondary, or co-investment.

For other large institutional investors, I think a serious question that needs answering is whether to build a private equity programme in house or outsource, especially as the private equity landscape broadens and becomes more complex, and where scale, reach, and specific investment experience and capabilities are necessary to find and diligence the best opportunities globally.

What would you say is the biggest change in terms of how a GP treats its LPs?

Many GPs are becoming much more open and communicative with LPs in this environment. The better GPs are actively entering into a dialogue with LPs about the evolution of their strategies, the opportunity set they are seeing, fund terms and lifespans, and how they might have to change.

The next few years will separate the differentiated, credible, patient, experienced, and successful investors from the multitude of "me too" teams and strategies, with such proactive dialogue one of many leading indicators of quality and sustainability.

What is more relevant when assessing the merit of a GP:track record or current underlying portfolio?

Track record at a high level is relevant, as is current portfolio quality, but both will only tell a small part of the story and are insufficient to drive an investment decision on their own. For us, the micro-level, bottom-up analysis of how that track record was derived is a critical input to an investment decision.

Specifically, we will focus a lot of time in diligence on the sources of value creation and how the principals in a private equity fund interacted with the company and the management team to understand skills and capabilities that may be replicable, and may play well in an evolving investment environment.

Of equal importance is understanding the key individuals involved, their backgrounds and motivations, and ensuring that they are strongly economically aligned with investors.

What is the best indication of the true skill of a GP: cash in versus out in the past five years, or current performance (realised and unrealised)?

Current realised and unrealised performance is important, but has to be assessed with great caution as it is manipulable and subject to substantial judgement in its development and reporting. That said, the process of assessing it on a quantitative and qualitative basis provides substantial insight into the team and strategy, so from that point of view it is highly relevant.

Cash-in versus cash-out is of course the ultimate measure of investment success, but is by definition only measurable and meaningful for more mature teams and strategies. And while it is relevant as the ultimate performance measure, one always has to think carefully about whether the team, strategy, and capabilities that gave rise to such success are replicable and relevant going forward.

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• UK / Ireland