Spotlight Series: Richard Wilson on why the AIFM directive is only the beginning

December 16, 2020

Spotlight Series: Richard Wilson, Senior Partner, Apax Partners, took part in an expert panel debate entitled ‘Regulation. Assessing recent and forthcoming changes to the global regulatory landscape - Examining the burden of compliance, the impact on cross-border investing and how it will affect GPs and LPs

Other experts debating the issue were Urs Wietlisbach, Partner & Executive Vice Chairman, Partners Group, Didier Millerot, Deputy Head of Unit, Asset Management, DG Internal Market & Services, European Commission and Marco Wulff, Director, Capital Dynamics.  The moderator was Josh Lerner, Jacob H Schiff Professor of Investment Banking, Harvard Business School.

In an interview with Josh Lerner, Harvard Business School, Richard discusses the approval of the AIFM and looks at the potential impact of future legislation.

Post Under: Legal & Regulatory

Spotlight series: Daniel H. Mudd discusses how the hedge fund and private equity managers at Fortress Investment Group complement each other

December 10, 2020

Daniel H. Mudd, Chief Executive Officer, Fortress Investment Group, took part in an expert panel debate entitled ‘Is this the End of the Mega Fund? How are GPs adjusting to a post-leverage world & how will they generate value.’

Other experts involved in this debate were Steven Costabile, Managing Director, Head of Private Equity Funds Group, Pinebridge Investments, Hisham El-Khazindar, Managing Director & Co-Founder, Citadel Capital and Steve Pagliuca, Managing Director, Bain Capital.
This debate was moderated by Josh Lerner, Jacob H Schiff Professor of Investment Banking, Harvard Business School.

In an interview with Josh Lerner, Daniel discusses how the hedge fund and private equity managers at Fortress Investment Group complement each other.

Post Under: Middle East

The titans of Private Equity go back to basics

October 19, 2020

Day 2 of SuperReturn Middle East saw a gathering of a particularly august panel of private equity leaders.  Joining Josh Lerner, Harvard Business School was Steven Costabile, Pineridge Investments; Hisham El-Khazindar, Citadel Capital; Steve Pagliuca, Bain Capital and Daniel H Mudd, Fortress Investment Group to debate the trend to “back to basics”.

First up was Steve Pagliuca to review issues in portfolios and how GPs are resolving the problems.  Steve said the difference between the issues of the ‘80s and ‘90s and now is that the debt is structured in a more patient way.   In the ‘90s if you defaulted, the banks would move in straight away.

This patience has allowed companies like Bain Capital to send in specialists to work with the portfolio companies on working capital and cost reduction programmes, to great positive effect.  Now the companies are running lean and well.  The big fear is a double dip recession and how would the companies cope.

Hisham commented that the MENA region was relatively insulated from the crisis with the exception of Dubai but that operationally there are lessons to be learned.  A shift from minority holdings to significant or majority holding in PE companies shows an increased understanding of the importance of control and involvement.

He argued that not all operational improvements are about cost cutting and downsizing but about making sure you get financing to bolt on businesses that can expand and improve your portfolio.

Additionally, local GPs firms are learning the importance of management experience that extends beyond the financial expertise to do deals to the ability to develop and grow the portfolio businesses.  The acquisition of talented managers with backgrounds in engineering and management consultancy should be fast tracked.

Josh then turned to Daniel Mudd and asked what private equity has learned from the crisis. For Daniel, the bulk of the “selling at gunpoint” deleveraging has past so now its time for corporations to look at their portfolios and decide what business they are in, what business they want to be in and start to restructure their portfolios accordingly, which may often involve sales to private equity firms.  Another positive outcome of the crisis is that banks are better able to look at private equity companies, assess them and re-term the loans constructively.

Steven Costabile took up the discussion on whether we could expect an extended period of smaller deals.  He believes that most institutional investors now understand that just because you can do a deal, doesn’t mean you should.  While many institutional investors say they are looking for absolute returns, what they are really looking for is relative returns, relative to the public markets.  And there the bar has been lowered.  It will be 3-4 years before we get back the old levels.  This is the perfect time for platform acquisition and there are lots of opportunities.

So to summarise in the words of Josh Lerner, the immediate future for private equity is “not small is beautiful but focus is beautiful”

Post Under: Middle East

Mission Impossible? Managing Risk in Private Equity Portfolios

October 5, 2020

Josh Lerner, Harvard Business School, will speak at SuperReturn Middle East, 18 - 20 October 2020


Josh Lerner, Jacob H Schiff Professor of Investment Banking, Harvard Business School, will be presenting new research at the SuperReturn Middle East conference in Abu Dhabi (18 - 20 October 2020) on risk management.

This talk will grapple with what is in many respects the most challenging questions in private equity today.  There are no firmly established answers as to how risk and reward should be assessed in this industry.  This arena is a rapidly changing one, with new ideas and approaches emerging every year.

Why should the decision to allocate money to private equity pose more difficulties than other asset classes, such as government bonds or European equities?  The crucial problem lies in the nature of the investments that general partners make.  What makes private equity particularly tricky to evaluate is the fact that private firms affected by three essential problems:

  • First, the firms receiving capital from private equity funds very often remain privately held for a number of years after the initial investment.  These firms have no observable market price. In addition, the private equity funds themselves, which are typically structured as private partnerships, do not typically trade on an organized public market.  Hence, investors cannot observe their valuations.
  • Second, valuations assigned by private equity firms to their own portfolio of investments are often based not on quantitative metrics (such as price-to-earnings, market-to-book, or discounted cash flow), but rather on complex, frequently subjective assessments of a venture’s technology, the market opportunity it can expect and its management team.
  • Finally, private equity valuation levels, as a whole, appear to rise and fall dramatically over time in response to the fundraising environment.  For example, when considerable capital is flowing into private equity funds, valuation levels rise significantly, and vice versa.  Work exploring the U.S. venture capital industry makes this point explicitly, showing that each doubling in the level of fundraising was associated with between a 7% and 21% increase in valuation.  These results suggest that more than the forty-fold increase in venture fundraising between 1991 and 2000 in the United States alone led to a six-fold increase in valuation levels.


But despite these difficulties, practices in this arena seem far from ideal. A recent example is from the buyout industry following the September 2008 financial crisis. During the fourth quarter of 2008, private equity funds reported returns of -16%, according to Cambridge Associates. This might seem bad enough, but many observers were skeptical about these reported returns. In particular, they pointed out that over the same period, the S&P 500 declined by nearly 22% and many other benchmarks did even worse. Moreover, in most cases the equity of the buyout funds was highly leveraged, and thus the effect of any losses should have been magnified.

Based on these vignettes, many readers might end up agreeing with Bob Boldt, the head of University of Texas’ endowment, who when discussing the private equity performance numbers that the University had disclosed, noted “I hope when people write about these numbers, they include some sort of warning like on cigarette packages.  They can be harmful to your health if you pay attention to them.  To be sure, the calculation of private equity returns is not an easy challenge. But as we will discuss in the session, there are ways to look systematically at these issues.

In general, it is hard to be convinced that there is a definitive answer about thinking about the risk and returns of private equity. In general, it is fair to say that most studies conclude venture firms match or slightly exceed the benchmark, while most suggest that buyout funds lag returns. But few studies have included the boom period for buyout funds in the mid-2000s and the subsequent bust, and thus, subsequent funds may differ.  Moreover, the results seem incredibly sensitive to assumptions made while modeling the evolution of the value of private equity portfolios.

Nonetheless, the importance of the topic cannot be understated.  As the recent financial crisis has underscored an understanding of the risks one is assuming is absolutely essential.  Thus, investing in understanding the key issues in this arena will pay substantial dividends.

About Josh Lerner

Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School.  His focus is on the world of alternative investments, with a particular emphasis on venture capital, private equity, and sovereign wealth funds.  He also examines how public policies can boost entrepreneurship, most recently in the book Boulevard of Broken Dreams. In the 1993-94 academic year, he introduced “Venture Capital and Private Equity” has consistently been one of the largest elective courses at Harvard Business School.  He is leading an international team of scholars in a multi-year study of the future of alternative investments for the World Economic Forum.

Post Under: Middle East

Spotlight Series: Sev Vettivetpillai, Aureos on the battle for hearts and minds outside China and India

September 24, 2020

Sev Vettivetpillai, CEO, AUREOS presented a session entitled “Portfolio companies & the war for talent: How can you evaluate portfolio companies in Emerging Markets & how do they deal with specific challenges that these markets generate?”

In an interview with Josh Lerner, Jacob H Schiff Professor of Investment Banking, HARVARD BUSINESS SCHOOL for the Spotlight Series, Sev looks at the slow changing attitudes of the LP community to Emerging Markets outside China and India.

Post Under: LP/GP Relations

Spotlight Series: Howard Chao, O’Melveny & Myers looks at the rise of RMB funds.

September 1, 2020

Howard Chao, Head Of Asia, O’MELVENY & MYERS moderated an expert panel debate entitled “Exploring The New Wave Of China Sponsored Private Equity Funds”.  Joining him were Andrew Yan, Managing Partner, SAIF PARTNERS; Yibing Wu, President, CITIC PRIVATE EQUITY FUNDS MANAGEMENT; Derek Sulger, Managing Partner, LUNAR CAPITAL MANAGEMENT; David Pierce, CEO, SQUADRON CAPITAL and Hao Wu, Partner, SINO-CENTURY CHINA PRIVATE EQUITY.

In an interview with Josh Lerner, Jacob H Schiff Professor of Investment Banking, HARVARD BUSINESS SCHOOL for the Spotlight Series, Howard discusses the growth of domestic funds and the longer term (10 years) role of the international Private Equity community.

Post Under: Asia

Spotlight Series: David Wilton, IFC on educating the Board.

August 10, 2020

David Wilton, Chief Investment Officer, IFC presented new research entitled “Comparison of performance between first time fund managers & established managers moving into a new market. How important is track record?”

In an interview with Josh Lerner, Jacob H Schiff Professor of Investment Banking, HARVARD BUSINESS SCHOOL for the Spotlight Series, David explained that globalisation and market based economies in emerging markets has improved their situation but that education on Emerging Markets potential for boards to make the shift remains a big challenge for the investment professionals.

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