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In the third episode of Titanbay's Fireside Series, Beth Johnson, a Partner at Pavilion, a Mercer Practice – and one of the world’s largest investment consultancies – joined us to talk about private markets’ role in a portfolio and how to construct a long-term private equity programme.
Below are a few of her key takeaways:
Starting your PE portfolioThere is room for manager alpha
The differentiation in returns from a bottom and top quartile manager is hugely significant, meaning it’s important to get into second or first quartile managers. Don’t only go for the big names. Sometimes it’s worth taking a risk on smaller funds but make sure to do your due diligence.
Repeatable track record
Be sure to choose a fund with a manager you believe to have a repeatable track record going forwards. Look for consistency of strategy and team and review past performance to see if they can deliver within their chosen strategy.
Be flexible in your mindset
Don’t just box tick. Read up on funds, their deal flows, whether their investments still align with your interests and what you thought they’d be investing in. While it’s important to have goals and stick to them, have some flexibility in your mindset.
It pays off to start small
If you have an opportunity to get exposure to a truly top decile firm, even if it is just a small allocation, you’re better off still going for it as it could mean you get better access further down the line.
Portfolio construction
Traditional buyouts provide the steadiest foundations
Traditional buyout funds should make up a large basis of your private equity portfolio. This can be a mixture of small, regional, sector-specific, and larger ones. Then you could layer in more risky elements, like distressed for example, when it makes sense to after a market fall.
Venture capital can really pay off
Consider building in some venture capital. It’s one of the highest performing parts of private markets but you need time and patience as these are also some of the most risky, leading to substantial variation in returns. Given there’s such a differentiated scale of risk, it should be a smaller component of your portfolio.
Consider VC fund of funds
To mitigate some of these factors, VC funds of funds can be an ideal way to spread risk. For smaller investors making just a few private equity commitments each year, this can be particularly useful.
A little bit of everything in every year
One particular year could be the best year for a given strategy and so by missing out on a vintage, you may miss out on the returns of a lifetime. That is why it is important to have a consistent approach year to year, that align with your overall objectives.
Use secondaries for back-dating a portfolio
Where there are gaps in your portfolio, particularly when you are just starting out, see if you can use secondary funds to back-date a portfolio to help balance out cashflow needs.
Regional exposure
It’s better to have a regional spread than going all-in to Asia or US in any given year. Given the macroeconomic overlay, also consider how Africa and EMEA fit in with your portfolio.
Market trends
The unstoppable rise of technology
Technology is changing so quickly. Opportunities will continue to grow, especially when you look at the demographics globally – there’s a growing middle class and a huge segment are still getting connected to the internet, using mobile phones etc. Technology will undoubtedly be the driver of almost everything.
Do well by doing good
This is a major global focus, and we’re now on the cusp of an inflection point. There is potential to make a real difference by proactively investing in ‘good’ as opposed to just avoiding investing in ‘bad’.
ABOUT THE SPEAKER
Beth is a Partner and senior investment consultant at Pavilion, a Mercer practice. She currently services six endowment, foundation and family office clients with more than $9 billion in aggregate assets under advisement. For these clients, Beth focuses on projects relating to asset allocation, investment manager selection, performance evaluation, and fund operations and governance.
Beth’s prior professional experience includes work as an investment director for Vanderbilt University’s endowment, where she was responsible for investments across traditional equities and bonds, marketable alternatives, oil and gas, and private equity. She started her investment career as an investment analyst at Duke Management Company, managing investment projects across all asset classes for Duke University’s endowment office.
Disclaimer
The views, opinions and estimates expressed herein constitute personal judgments of certain members of the Titanbay Ltd. (Titanbay) team based on current market conditions and are subject to change without notice. This information in no way constitutes Titanbay research and should not be treated as such. Titanbay does not make investment recommendations, and no communication, including this document, should be construed as a recommendation for any security offered on or off the Titanbay investment platform. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production.
This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, investors should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment in private placements involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance is not indicative of future results. Non-affiliated entities mentioned are for informational purposes only and should not be construed as an endorsement or sponsorship of Titanbay.
Investments in private placements, and private equity investments via feeder funds in particular (such as through the Feeder), are speculative in nature and involve a high degree of risk. The value of an investment may go down as well as up, and investors may not get back their money originally invested. Investors who cannot afford to lose their entire investment should not invest. Past performance is not indicative of future performance. Please refer to the respective fund documentation for details about potential risks, charges and expenses. Prospective investors should carefully analyse the risk warnings and disclosures for the respective fund or investment vehicle set out therein. For private equity investments via feeder funds, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. Investments in private equity are highly illiquid and those investors who cannot hold an investment for the long term (at least 10 years) should not invest. The external Alternative Investment Fund Manager is Avega Capital Management S.A., a public limited company (société anonyme) formed under the laws of Luxembourg, with registered office at 2, rue Edward Steichen, L-2540 Luxembourg, Grand Duchy of Luxembourg, and registered with the RCS under number B 246.691.
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