fundraising special - BVCA admin

LP Voice
Q1 Why does ff&P Asset Management invest in
private equity?
FF&P Asset Management invests in private equity on behalf of its clients
because the asset class has shown it can deliver superior outperformance
of public markets over the long term. The clients are mostly individuals
and families with medium to long term investment horizons and a
requirement for absolute returns and cash generation.
Q2 What is your investment strategy?
We are discerning private equity investors and believe extensive
research and due diligence on opportunities and managers is crucial.
Private equity can offer the largest spread of returns when compared
to other asset classes. The difference between a top quartile private
equity fund and a bottom quartile private equity fund can be expected
to be larger than most, if not all, asset classes. It is also the case that
when an investment is made into a private equity fund you expect to be
invested for a long time, often more than ten years. It is vital, therefore,
to establish a high degree of conviction in the investment case of all
investments at the outset. We believe our approach to due diligence
sets us apart from other managers.
While it is often frustrating for new managers, we do have a preference
to invest in managers with proven track records.
Q3 How do you decide which funds to invest in?
FF&P Asset Management has a global portfolio of private equity funds.
The common thread is that they are all experienced fund managers with
proven performance track records. We tend to work with experienced
managers who have performed well for us and who demonstrate
proven flair and investment acumen in their portfolio selections. A lot
of work is undertaken to see if the dynamics in the management team,
which contributed to its success, are still in place and the extent to which
macro factors are likely to contribute to continued outperformance.
In practice this often causes us to be loyal investors but the manager
always earns and deserves our loyalty.
This bottom up focus has to be matched with a top down approach
to ensure that the portfolio is balanced in the direction agreed by our
investment committee.
It is worthwhile noting that while we have benefitted from a healthy
exposure to emerging markets funds for many years, we do believe
that the global financial crisis of 2008 has created a lot of very attractive
investment opportunities in developed markets.
Q4 How do you think the industry has changed over the
last three years from the boom times to post-recession?
Over the last three years we have seen both peaks of greed and deep
valleys of fear. The widespread deleveraging that followed the financial
crisis has served to shorten investment horizons and place a higher note
32 January 2011 BVCA Briefing
with
Simon Jamieson
Director
ff&P Asset Management Limited
premium on less liquid investments. This has and will continue to lead
to a shakeout and a degree of specialisation. Managers with poor and
indifferent performance spanning multiple funds will struggle to raise
new fund capital.
The general partners and the limited partners have also had to adjust to
longer holding periods – stretching now to seven or eight years in the
venture space. A consequence of this is that limited partners can have
less cash to commit to the sector.
Q5 Over the last two years there has been much talk of
LP discontent over the way they were treated by some
of managers back in the boom days. Do you think this is
justified and how has investor sentiment been affected by
the recession?
A Scottish rooted house like FF&P has struggled with some of the terms
in the LP agreement, particularly relating to management and other fees.
However, these tend to be clearly stated and have been agreed to by
ourselves so there seems little ground for complaint.
Investor sentiment will have been impacted by the recession. In
previous cycles we have seen a rush to liquidity and a reduction in the
availability of private equity, which has in turn caused a period of good
returns for the asset class. This cycle may yet turn out to follow the
same pattern.
Q6 in recent months the private equity industry has been
challenged over its performance, and investors questioned
over why they continue to back the asset class in the way
that they do. As ff&P Asset Management has invested in
private equity for some considerable time, where do you
stand in the debate?
FF&P continues to believe that backing a good manager who invests in
good businesses over the long term is a proven way to create wealth
over the long term.
There will be periods of underperformance, especially when public
markets are so volatile. However, this long proven form of wealth
creation perhaps lends itself best to private equity with its long term
focus and structure.
Q7 What to you think are the biggest challenges that the
private equity industry faces in the coming months and
years, and what, as an investor, would you most like to see
change?
A challenge for the industry going forward is the valuation volatility in
many private equity portfolios, caused by the volatility in the public
markets being reflected through the Fair Market Value Accounting
principles. This lack of stability reduces the differential between public
and private equity and has consequently chipped away at one of the
historic characteristics of the asset class.