Interview: SVB's Allan Majotra

Anneken Tappe: How do you judge the UK's current economic situation from a private equity point of view?
Allan Majotra: While there are definitely some challenges from a macroeconomic point of view, in the UK and in the broader eurozone market, we are seeing private equity managers – including venture capitalists – take advantage of a variety of strategies. A lot of fund managers are successfully investing in UK companies that take advantage of growth industries, such as internet and the emerging markets, like Brazil, China and India, and thereby internationalising and growing at a nice pace. We also see them having a better grasp and focus on operational improvements in their portfolio companies. More GPs are doing hands-on investing and actually improving the investee company's operational performance for the better, as opposed to focusing solely on leverage and multiple expansion. There is also an increase in effective build-up strategies. The more experienced private equity managers realise that some of the most interesting returns come from investments made during down cycles.

Things are definitely not as bad as they are made out to be! In the UK, there is expertise as well as access to global opportunities. In terms of sectors, internet, mobile and technology generally are growing at a fast clip and offering many interesting investment opportunities.

If you have the track record in terms of returns and the right expertise, there's no question whether you will be able to raise a new fund. It is about historical performance, relevant strategies that reflect the current performance drivers and long-term partnerships with investors. At the same time, one has to keep in context that globally, only about 50% of the funds raised in 2007 have been raised in the last year and fundraising is still pretty challenging.

AT: Some time ago, voices got louder among European experts that the days of successful funds-of-funds are numbered. What do you think about that?
AM: It is true that funds-of-funds have been in the limelight and have faced criticism about their longer durations and incremental fees, and in some cases, even their business rationale. We, on the other hand, believe that specialisation, be it regional or sector-based, or simply a broad and deep private equity investment capability will allow funds-of-funds to continue to make sense. In the end, it is about providing investors, small and large, access to the full range of private equity asset class that they may not be able to on their own.

A big selling point for our fund-of-funds is our sector expertise through banking and lending to both the fund managers and their portfolio companies. Hence, our own LPs – from pension funds to endowments to sovereign wealth funds to family offices – have all found that we can give the right exposure to a specific private equity segment, which is offering attractive returns.

AT: LPs seem wary and risk-averse. What kind of behaviour have you seen from LPs?
AM: Assets under management declined for many institutional investors due to the crisis. Listed equities crashed and suddenly private equity allocations represented a larger chunk of their portfolios. Now those assets under management are back at the 2007 levels for many managers, private equity allocations have certainly declined in weight within many institutional portfolios.

We have also seen LPs continue to receive distributions from fund managers over the last few years, while being relatively quiet on the new commitment side. At the same time, generally, the consensus is that private equity will continue to outperform other asset classes, in the mid-term. So all this is good news from a GP perspective.

There are also new types of LPs out there. Emerging markets pension funds have only just started to look to other continents for their private equity allocation. The same goes for sovereign wealth funds. Adding those two groups to the traditional picture of LPs helps the sector compensate for the relatively quiet banks and insurance companies as private equity investors.

Bank lending has been a continuous problem since the financial crisis started. In Europe, where high-yield markets can't be the panacea due to its market size, there is need for alternatives.

AT: What is your outlook on the European debt market?
AM: I think the current developments in debt markets will continue for some time. Banks are indeed lending, but on a more strategic level. They might ask for more equity or a different set of terms and conditions, for the right borrower. But we have also seen both new debt products and new sources of debt coming in to the market. High-yield bonds and mezzanine is filling in some of the gap. An increasing number of debt funds and insurance companies, as well as sovereign wealth funds have been seen in the space.

All this makes for a richer variety of debt pools with new products and providers, in the longer term. At SVB, we have been very actively lending in our target markets, technology and at the fund level and have actually grown our loan book quite significantly, in the last year, in the UK and globally.

AT: How do you evaluate the effect of new regulation in the industry?
AM: Regulation impacts private equity in different ways: indirectly, through its impact on the lenders and the LPs; and directly, through a specific impact on the fund managers themselves. What is most important for the ongoing regulatory reform is to ensure that such changes don't alter the basic fundamentals for this important industry. Overall, we believe that there continues to be a sense of cautious optimism in the industry.

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