How to manage & mitigate risk in the UK Private Equity market

16. September 2016 UK 0
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UK Private Equity Conference

9th September 2016

Waldorf Hilton, London

http://pe-conference.org/british/

by Rebecca Ford

 

The Opening Panel of the UK Private Equity Conference was overall surprisingly upbeat, considering the recent political and economic difficulties brought about the UK’s referendum on European Union membership. The speakers discussed Brexit, the management of risk, and the importance of the relations between all the parties within the investment process. We’ve put together a list of four key takeaway points from the discussion for you.

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1. Brexit isn’t all bad news
Whilst the speakers all acknowledged that the uncertainty and instability resulting from the UK’s decision to leave the European Union was problematic and would increase the risk involved in the European investment market, there were also some notes of genuine optimism. Kathleen Bacon, Managing Director at HarbourVest, and Allen MacDonell, Managing Director of the Teacher Retirement System of Texas, both suggested that such an uncertain climate can “create motivated sellers” (MacDonell) which is opportunistic for private equity because these sellers may be willing to accept a previously rejected proposition, pushing up the return potential from these deals. Stuart Gent, Managing Director at Bain Capital, avoided making any specific speculations about the future of European private equity in the wake of Brexit, but looked at it as simply “an increase of volatility and risk and range of outcomes”.

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“The word risk is now the number one word people are focusing on.” – Kathleen Bacon 

2. Risk can always be managed and sometimes mitigated
All of the speakers offered suggestions of ways to mitigate risk and deal with the uncertain economic environment, but some of these involved necessarily accepting lower returns in exchange for lower risk. Kathleen Bacon said that “the word risk is now the number one word that people are focusing on” and suggested that investors must either go short term and get money in and out quicker, or go long term and be “consistent and patient” through difficult times. Allen MacDonell focused on the need to prepare fully and comprehensively analyse the risk and potential return of each case on a completely individual basis in order to make investment decisions. For him, having a full understanding of the value creation thesis of the management team allows him to gauge whether they have the experience and expertise to cope with a deal.  Joe Topley, Head of European Private Equity Funds at the Ontario Teachers’ Pension Plan took a slightly different approach: he said that diversifying the type of investment into private debt and preferred equity gives lower returns but also can have much lower risk variables.

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3. GP/LP relations are vital to the success of a co-investment
The speakers all generally agreed on the importance of strong ties between GP and LP in a co-investment scenario. Joe Topley, speaking from the LP perspective, emphasised the importance of having something unique to add to the deal in order to attract GPs, with relevance and flexibility being the examples he offered. Kathleen Bacon echoed this, but her approach was more cautious. Referring to a personal example of a difficult Italian deal with a chemicals company which was seriously affected by the 2008 crisis, she noted that having fund reserves to support investments through any potential difficulties was essential, along with dedicated teams for these potentialities and close GP/LP relations. Stuart Gent, from the GP perspective, said that it was important to him to work with an LP who understands their strategy from a co-investment point of view, as it is that partnership which must be presented to a seller and a management team and so it must appear functional and capable of success. He said that “it’s about an ongoing dialogue opposed to a single event”, highlighting the centrality of the long-term relationship to the success of the partnership.

“It’s all about relationship, it’s about alignment, it’s about an ongoing dialogue as opposed to a single event.” – Stuart Gent

4. “This industry is about manager, manager, manager”
Kathleen Bacon’s remark towards the end of the panel discussion underlined her belief in the quality of the people within the portfolio firms contributing the most to the success of a deal. Stuart Gent also alluded to this, noting that the risk is always higher in the first three years of an investment period because of changes to systems and management, but once these are settled and all the players are comfortable with the managing team, the relationships between management and investors and between GP and LP can change in the third to fifth years because the risk has been managed and thus mitigated.


The Opening Panel gave us some interesting insights into the private equity industry in the UK and the varying points of view represented in the different perspectives of the speakers. Brexit, of course, will continue to dominate the private equity landscape in the UK and in Europe, but the cautious optimism of the speakers was reassuring, and they all made it clear that with careful planning and good management, private equity will see Brexit through just as it has seen through the numerous other crises Europe seems to suffer “every three or four years” (Kathleen Bacon). As moderator Eli Talmor, the founder of the Institute of Private Equity indicated, there will never be a perfect time to invest, and it comes down to making decisions and committing to them.

Private Equity Insights would like to thank all our speakers and our moderator/sponsor for this Opening Panel.


Stay tuned to find out more about the upcoming UKPEC official report!

 

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