Unigestion’s Hanspeter Bader sees private equity helping institutions struggling with asset allocation in a hostile climate.
In advocating an allocation to private equity, Bader says: “Like all equity, it has a certain amount of inflation protection included in it, given that company earnings grow when inflation is higher – so private equity helps to reduce the interest rate risk.
“It helps diversify a portfolio, because you have a relatively low correlation to other assets, and also that correlation is lagged – private equity comes down six months after public equity.
“You are also invested in a different, much larger universe to public equity’s, so to a certain extent there is a disconnect from the sentiment in public markets.”
Some of Unigestion’s private equity mandates have made net internal rates of return exceeding 10% over 12 years, including through two major crises.
They exhibited correlation to mainstream assets of below 0.5, lesser drawdowns and lower volatility than public equity.
Their returns resemble those of the Yale Model of investing, which relies heavily on alternatives including private equity, instead of resting on liquid equities and fixed income.
Some variants of the model, built by Americans David Swensen and Dean Takahashi, made nearly 12% per year in the decade to 2009, despite sharp falls in 2008-09. MSCI World lost ground over the same period.
Nevertheless, Bader says European pensions allocated on average, just 5% to private equity last year, and many Swiss, German and French funds had less. US pensions had a healthier 11%, up from 3% a decade earlier.
But why not more? Partly because they shun the relative illiquidity of many alternative strategies, and comparatively less transparency than public markets offer. Yet this is changing, Bader argues. A “higher velocity of cash” can be found by investing in more mature funds – for example via secondary markets – compared to making primary GP investments.
“At a time when commitments to private equity can cost a lot in terms of Solvency II, having funds giving quicker returns is important,” he says. Bader’s team targets more mature funds already 80% to 90% invested, closer to maturing and distributing capital.
Unigestion has had secondaries strategies since 2000, and about 35% of its private equity assets are currently in them. It overshot its $150m raising target for the latest secondaries product by $40m, and Bader does not rule out raising another next year, if the climate remains favourable.
He is selective about timing, though. Unigestion had no dedicated secondaries fund from 2004 to 2008 “when pricing was, in our view, irrational, but then in 2009 we saw a great opportunity and started to invest another vehicle”.
Pensions, insurers and European family offices filled the latest secondaries fund.
Bader says some sellers in recent crises looked to offload GP stakes privately, to raise cash after “overexposing themselves to private equity, then facing capital calls”.
His team typically spent $5m to $25m to hoover up each “top quality GP”. These were typically well-known by, and often existing investments of, Unigestion.
“It is always nice to have a big discount buying secondaries, but it is the expected returns that are key,” Bader says. “But what we care about is the absolute return that we can expect from an investment.
“We look to each of the fund’s underlying assets, and ask when the manager expects to sell it, and at what price? Then we stress [those assumptions].”
Bader says secondaries can also improve transparency – another problem, say some allocators– “because you see and price what you buy, and write off what’s not worth anything”.