Smaller private equity firms can deliver Alpha
20 May 2015 Guernsey
Image: Shutterstock
Private equity firms should go "back to the future" to deliver on investor demands for Alpha returns, according to chairman and chief investment officer of Terra Firma Capital Partners, Guy Hands.
Hands gave the keynote speech to a 500-strong audience at the Guernsey Funds Forum 2015 in London last week.
He said that the private equity industry is now split into two segments: the semi-public, listed companies such as Blackstone, Carlisle, CVC and Apax who represent about 85 percent of the money raised; and the remainder, which raises about 15 percent of the money but actually comprises the vast number of firms.
The latter have struggled to raise money since 2008 but Hands has claimed that investors are demanding Alpha and these firms are better positioned because, “when you get to a certain size, you create Beta; it becomes impossible to create Alpha.”
Hands said that the larger firms had got themselves a position that is not challengeable by smaller private equity firms and therefore these smaller firms would have to take a slightly different approach.
He stated that they would have to accept that they are not going to be as rich as the last generation but they could still create a very successful firm and develop a very successful private equity industry.
Hands said he has concluded that investors want four key things: low fees but not too low; people with the ability to execute but not so many that you start to dilute intellectual thinking; alignment of interest and, “above all, giving investors something they can’t get from the big firms, which is largely the ability to produce Alpha.”
He commented: “I think for the smaller firms, for the firms who haven’t raised money since 2008, and there’s a lot out there in Europe, I think there’s a great opportunity out there but it’s not banging your head against that wall, it’s going around that wall.”
“It’s not expecting to earn huge amounts of salaries, it’s about creating wealth, it’s about doing what private equity was originally formed to do when the industry started in the ‘70s, it really is just about going back to the future.”
Hands gave the keynote speech to a 500-strong audience at the Guernsey Funds Forum 2015 in London last week.
He said that the private equity industry is now split into two segments: the semi-public, listed companies such as Blackstone, Carlisle, CVC and Apax who represent about 85 percent of the money raised; and the remainder, which raises about 15 percent of the money but actually comprises the vast number of firms.
The latter have struggled to raise money since 2008 but Hands has claimed that investors are demanding Alpha and these firms are better positioned because, “when you get to a certain size, you create Beta; it becomes impossible to create Alpha.”
Hands said that the larger firms had got themselves a position that is not challengeable by smaller private equity firms and therefore these smaller firms would have to take a slightly different approach.
He stated that they would have to accept that they are not going to be as rich as the last generation but they could still create a very successful firm and develop a very successful private equity industry.
Hands said he has concluded that investors want four key things: low fees but not too low; people with the ability to execute but not so many that you start to dilute intellectual thinking; alignment of interest and, “above all, giving investors something they can’t get from the big firms, which is largely the ability to produce Alpha.”
He commented: “I think for the smaller firms, for the firms who haven’t raised money since 2008, and there’s a lot out there in Europe, I think there’s a great opportunity out there but it’s not banging your head against that wall, it’s going around that wall.”
“It’s not expecting to earn huge amounts of salaries, it’s about creating wealth, it’s about doing what private equity was originally formed to do when the industry started in the ‘70s, it really is just about going back to the future.”
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