As the private-equity industry regains its momentum, savvy alternative-investment managers are developing innovative approaches to raising funds and investing growth capital. To wrap up the 2013 Michigan Private Equity Conference, a panel of industry experts discussed the advantages and challenges of several forward-thinking fundraising and investing strategies.
The strategy: Invest “patient” capital in growing businesses
Michael Oleshansky, principal at Private Investments Group of PSP Capital Partners, said the Pritzker family’s private investment firm makes long-term investments in lower- and middle-market companies and brings together a network of resources to help them grow. “We invest to grow companies in close partnership with entrepreneurs, business owners and management teams,” he explained. “We’re not a fund. We invest from our balance sheet. We have no desire to flip companies. We have patience, so there is no need to exit in a particular time period.”
The advantage: “Patient” capital allows companies to grow and create long-term value.
The challenge: The model only works when there is good alignment between what the business owner is seeking and what PSP Capital Partners is offering.
The strategy: Incentivize limited partners
Joseph O’Connor, investment manager at AlpInvest Partners, said he uses three different approaches, or “buckets,” to incentivize limited partners to commit money to private-equity funds. First, he may give preferred terms or discounts on carry or management fees to LPs that agree to close on the first round. Second, in cases where an LP needs greater liquidity, O’Connor may offer access to a secondary transaction in exchange for a funding commitment. Third, he said, “I may extend the current fund life to get more runway or try to raise an annex fund. We’ve seen these approaches work. It’s all about getting the right fit with the LPs.”
The advantage: GPs can raise bigger funds, and LPs can get preferred terms, fee discounts and access to liquidity.
The challenge: “Preferred terms and discounts must work for both sides,” O’Connor cautioned. “It’s a precarious balance.”
The strategy: Develop retail-sales products and strategies for private-equity investments
As the executive VP and head of distribution at Behringer Harvard Holdings Inc., Robert (Frank) Muller Jr. is interested in packaging traditionally illiquid private-equity investments into mainstream retail offerings. This is still a relatively untested market space, however. While employer-sponsored savings plans, such as 401(k)s, are broadening their menus of investment options, many are still heavily focused on traditional stock and bond funds. Still, Muller said, baby boomers are looking for higher returns, such as those from PE investments, which would help to bridge the gap between their current retirement savings and post-retirement financial needs.
The advantage: Private-equity investments have the potential to outperform stock and bond mutual funds in defined-contribution plans.
The challenge: Regulatory and redemption hurdles must be overcome.
For more information on the 8th annual Michigan Private Equity Conference, visit our page.