The view from the Funds team – Lorna Robertson Q4 2023

News: Insight & Opinion | 8 December 2023

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Several strategies stand out, but top manager selection remains key, says Lorna Robertson  

Despite the difficult fundraising environment in the last quarter amid liquidity constraints, we were pleased to have completed investments in CVC Capital Partners’ flagship €26bn private equity Fund IX and Epiris Fund III, a specialist complex deal-type private equity strategy, demonstrating that capital can be made available for the right opportunities with the right managers in the current climate. As we approach the end of a challenging year, it is pleasing to report that the fund portfolio continues to perform well and make regular cash distributions, from Permira’s CLO equity funds with quarterly payments, to the more sizeable distributions due to be paid before the end of the year from the Therium litigation funds and Hambro Perks Special Opportunities Fund I, to name a few. 

We’ve also tapped into this liquidity theme by targeting private equity continuation vehicles, where fund managers are who are reluctant to sell prize assets but require liquidity are transferring them into continuation funds. Our first such investment completed last quarter with Preservation Capital Partners, and we are on the look-out for more but only on an opportunistic basis. 

Looking ahead, we continue to seek out parts of the market where market tailwinds should boost specific strategies. One area we have identified is European healthcare, which is a resilient, defensive sector where valuations remain strong. Here, we are looking to invest in a sector and deal-type specialist fund.  

Another area of focus is private equity co-investment strategies. General partners (GPs) are increasingly creating co-investment vehicles to enable them to target larger transactions and grow their assets under management. For us, it’s a fee-efficient way to invest in a diverse portfolio from blue-chip fund managers. We’re currently looking at a dedicated flagship co-investment fund from a top-tier manager due to launch in Q1 2024. 

A third is GP and LP (limited partner)-led secondaries strategies. Again, this plays to the theme of liquidity constraints. At a time when IPO activity is muted, demand for secondary investments continues to grow, and we are looking to complete an investment in a middle-market GP-led secondaries strategy early next year. 

For the first time this year, commercial real estate funds are also on our radar. We are looking to add a UK value-add, growth strategy because we believe now is an ideal time to come to market with a manager with a track record of delivering value even in times of strife. Positioned to take advantage of distressed sales at reduced prices from motivated sellers, Barwood is driving value and capital appreciation through property development, refurbishment, active asset management and planning gains, and targets sectors that are buoyed by demographic changes in the economy. 

Opportunistic credit strategies are creating a lot of buzz in the market at the moment, with interest rates likely to stay relatively high for the near term at least credit investments need to have the potential to deliver compelling risk-adjusted returns to make them worthwhile (compared to zero-risk cash accounts paying 5% or so). We’re focussing on resilient sectors that are likely to perform irrespective of market stresses and aiming at the upper end of the returns profile (15% IRR upwards). We are currently assessing three opportunistic credit managers where the strategy is asset-backed or with contractual income, giving downside protection, and that also offer scope for equity upside. 

Geographically focussed funds are interesting, particularly in the Nordics and DACHs regions where there are diversified growth opportunities in industrials. And last, but not least, we are looking at semi-liquid ‘evergreen’ strategies from top GPs, which are increasingly being developed for the wealth management market, as fund managers have realised the importance of private wealth investors as a diversified source of capital and are evolving their product offering accordingly. These comprise a participation strip across a range of their top performing private equity funds, priced on a NAV basis, to which private investors can subscribe and withdraw capital, usually quarterly, giving them a degree of liquidity.  

These types of fund strategies have not been prevalent until relatively recently, but now managers are becoming less reliant on institutional capital, even the biggest GPs are seeking to partner with private wealth consolidators. This plays well to our offering. We are currently evaluating two such funds: one in collaboration with a leading sovereign wealth fund manager and the other in the mission-critical software and services space from one of Europe’s top managers in the technology sector. 

To access these opportunities, we’re proactive in pinpointing and approaching new top quartile fund managers in particular areas of interest, as well as in strengthening our existing GP relationships. Our unique, targeted selection process means that once we’ve identified those strategies with the most potential, we then only work with the best performers in those fields. It’s an approach which continues to work well.