Institutional Asset Manager Newsletter 14.07.23

A new era for private equity

Private equity is the asset class of the moment with news this week with HarbourVest Partners announcing it is joining forces with Swedish government pension fund AP7 to launch a new USD835 million open-ended evergreen private equity fund.
Meanwhile Federated Hermes has announced the successful closure of its fifth Private Equity Co-investment fund having surpassed its USD400 million funding target by USD86 million.
Both stories reflect what a July report from McKinsey calls a new era for institutional investors "marked by uncertainty, disruption, and radical shifts in public expectations of business and society".
In other words institutional investors cannot rely on public markets for reliable returns when the future is so difficult to forecast. Examples being a global pandemic, a war in Europe, an energy crisis, disruptions in global supply chains, inflation, and growing social division representing just a handful of the miseries we have all endured of late.
McKinsey says the challenge for investors is to develop a "distinctive and nimble" approach to portfolio construction by derisking portfolios and paying attention to inflation-linked assets if they believe higher levels of inflation may be entrenched.
And this inevitably leads to a re-examination of how they invest in private markets.
"More investors are jumping into early-stage investing, attracted by the value creation happening in the early stages of companies’ development," the consultancy says.
Simon Jennings, Managing Director and Head of HarbourVest’s private client group in EMEA and APAC, tells us that these are key reasons for the launch of its private equity fund.
"Private equity has historically outperformed public markets and offers the opportunity to deliver attractive returns at a time when private and institutional investors are looking for diversity and, if their investment parameters change, liquidity."
Elsewhere we talk to Eduardo Repetto, CIO at Avantis Investors, who tells us that the world of factor investing has become muddled and cluttered, and he likens the sector to a zoo.
This excessive choice of factors, Repetto argues, compromises investors’ ability to choose the elements that genuinely influence company performance, which in turn damages portfolio returns.
Repetto’s solution is to look for companies with high profitability and a high book to market ratio since they enjoy an elevated discount rate making them good value.
"For example, when we think about price to book, we know that price is part of a valuation and it’s a proxy for the equity of the company. But no one is going buy a company by just looking at book value. You want to know something about the flows of the company and its earnings. You have to consider all these different variables which will impact market return and put that into a valuation framework."
Repetto says this systemisation of factor investing is not a revolution but a return to basics, and is an important reminder that a simple solution is often the most effective.
The simple solution to the need for a holiday, is a holiday! We are pleased to tell you that Institutional Asset Manager will be taking its summer break from the newsletters – returning on 11th August. The site will be updated in the meanwhile in the usual way.
Gill Wadsworth, Editor
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