Consistency is king when it comes to providing distributions to limited partners, while the ability to adapt will serve private equity investors and managers well over the coming years, speakers said on a panel discussion entitled "Investing in a Fragmented World" on Sept. 10 at the annual IPEM conference in Paris.
Distributions are down on average, panelists said, but that situation is nuanced across LPs who may be more exposed to venture capital or large-cap private equity. Pacing will also differ across LPs, with those that scaled up in 2021 and 2022 taking theirs down.
“How you’ve constructed your portfolio over the past five years is determining your distributions today,” said Wesley Bradle, senior portfolio manager, private equity at the Florida State Board of Administration, Tallahassee. The board has $254 billion in state assets including the $193.2 billion Florida Retirement System Pension Plan.
The board has been consistent, contributing “somewhere between $1.6 billion and $2 billion” annually for more than 10 years, except in 2021 when contributions were $3 billion, he said.
Over that decade, distributions have been between $1.8 billion and $3.4 billion, he said, averaging about $2.5 billion. The outlier was 2021 when distributions hit $6.5 billion.
“I think the lesson here is that consistency is king when it comes to ... net cash flow back to LPs. And so those LPs who have been consistent, who have positioned their portfolio well, are seeing distributions just as they expect,” Bradle said.
Liquidity is also critical, panelists said.
“Any product that is providing liquidity ... at any point in the chain will be in high demand,” added Benoit Durteste, CEO and CIO at the $101 billion Intermediate Capital Group.
Adaptability is also key, with the panel discussing the move among private equity funds to become more specialized rather than taking a generalist approach.
“I think the direction of travel is towards greater specialization,” Durteste said. While size can be a competitive advantage for some strategies, “that gets eroded over time as more participants come into that asset class. And so if you want to preserve a competitive advantage, which, in theory, translates into better performance, you’re naturally pushed towards specializations, which could take many flavors: It could be by industry, it could be by geography, it could be a combination.”
Bradle agreed, adding that 10 years ago, about 70% of the portfolio was broadly generalist by sector, but today it’s 80% sector specialists or country or regional specialist in Europe or Asia, and 20% generalists.
“If you think about that, just in the context of numbers, we commit $2 billion a year. That’s almost a billion dollars a year that has gone from generalist to specialists,” Bradle said. Fifteen years ago, firms could approach LPs and tell them they were top quartile, show their returns, and say “please give us capital. And I think it’s just not enough today.”
Regarding adaptability, Ivan Vercoutere, CIO and managing partner at LGT Capital Partners, with over $100 billion in assets under management, said the industry has had “an amazing run,” but the maturing of the industry means change will come.
“And the big question for LPs is to recognize those changes early enough to adapt. It’s not the strongest that will survive — it’s whoever can be the most adaptable, identifying those changes and repositioning portfolios accordingly,” he said.
GPs will also increasingly seek out “other sources of capital outside the traditional institutional LP base,” said Michael Dorrell, chair, CEO and co-founder at Stonepeak Infrastructure Partners, which has $71.2 billion in assets under management. “I just think the industry’s got to a point where it’s ... mature enough that, to keep growing; you ... need to go and find other sources of capital.”
Dorrell said GPs have gained insurance capital, “but I think you’re going to see more and more GPs tapping into bigger and bigger retail funding. I know we’ve all had retail sleeves in most of our funds over time, but I think you’re going to see in private equity and infrastructure what we’ve seen to date in the real estate world, where you’re getting big, big pools of retail private capital. So we’ve got our eye on that,” Dorrell added.
Closing the session, Bradle said “the word that comes to mind for me is just hopeful. We’re two years off the bottom of public markets, and I think private equity is one of the most innovative asset classes. ... Private equity continues to reinvent itself, and so I’m hopeful that ... people figure out ways to get more distributions, more ways of liquidity and also just more ways of creating value."
