One private equity manager has gone back to the future in its approach to managing client money, as investors are finding deal sourcing difficult in the current markets.
A tricky period for making private equity deals last year led to Terra Firma Capital Partners Ltd. taking a good look in the mirror the middle of last year, and significantly changing the way it deals with client money, sources deals and reaps its own rewards.
“There were enormous amounts of money sitting in private equity firms — there is over $1 trillion uninvested right now — and at the same time we saw (sovereign wealth funds) and pension funds willing to invest directly themselves,” rather than through a private equity firm, said Guy Hands, chairman and chief investment officer at the London-based firm, in an exclusive interview.
Executives at the firm — which returned more than €6 billion ($6.6 billion) to investors and made more than €4 billion of profits for those clients, in the three years through 2014, in what Mr. Hands said was a “spectacular time” — realized that they needed to balance two things. Those were the firm's and clients' desire for alpha, and the fact that finding that alpha was more difficult “since the correlation between private equity and the other markets has become closer over the last 20 years.”
The result was a realization that executives needed to be more selective and entrepreneurial, and to take more time investing money. Mr. Hands said Terra Firma executives also were keen to better align its interests with those of its clients. A major change was to decide not to charge fees on uninvested capital. “The last thing (investors) want is a (general partner) who wants to invest money quickly just to earn fees,” he said. Another was to “look to invest at least 10% in any investment or strategy, to make it clear that we are investing for alpha rather than for fees,” he said.
Mr. Hands believes that is where Terra Firma has gone “back to the future. That is quite a big departure from the traditional institutional private equity blind pool fund. It is much closer to what existed back in the (19)70s.”