Private Capital Findings, Issue 21

Foreword

In an industry that places such a heavy emphasis on deal attribution, it is unsurprising that investment teams tend to talk about performance in the context of successful individual transactions they have completed. Yet private equity limited partners are likely to be more interested in how a fund as a whole has performed, since that dictates the return they receive. Our cover story for this issue, The power of portfolio construction, features new research that examines the contribution to performance of what is perhaps an underrated skill – building the right mix of investments in a fund to meet the risk and return objectives of its investors.

We also explore risk and returns in our roundtable discussion, Patterns of performance. While understanding a firm’s performance – past and present – has always been challenging, today’s slow exit environment is making this harder still, given that LPs are having to analyse more interim valuations on unrealised assets than usual. This issue’s roundtable participants debate the findings of two research papers that attempt to cut through some of the noisy data around subscription lines of credit and loss ratios and those of a third study, which suggests the history of reported valuations can be predictive of future returns.

With PE returns increasingly driven by the heavy lifting of value creation techniques, our analysis piece, Fit for the future, takes a look at whether firms are supporting their portfolio companies through digital transformation. It features the findings of academic research into the level of IT investment by PE firms and its effect on growth, innovation and fund returns.

Meanwhile, the continued development of considering environmental, social and governance (ESG) factors in investment decision-making may have become a divisive issue in some quarters, but it remains firmly embedded in many investors’ processes. And, as we highlight in Time to engage? new research suggests that the LPs who care about these issues are using the increasingly available information on GPs’ environmental and social track records and strategies to help determine which funds to back. Yet the piece also showcases further research that demonstrates the potential for unexpected outcomes when investors take a black-and-white approach to investing responsibly.

And finally, in our last word interview, The truth about direct lending, we talk to the academic behind research into how private credit funds behave. There is a perception that the relationship banking model pursued by traditional lenders is giving way to a transactional approach as direct lenders take market share, but is this really true?

As ever, we hope you find this issue informative and insightful, and we welcome any comments or feedback you may have. Please contact us.