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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.
Case study The Right Fit Kurt Geiger Private equity helps to grow one of Britain’s best known footwear retailers Funded by Kurt Geiger is among the most recognised shoe brands in the world and a genuine UK success story. Opening its doors for the fi rst time in 1963, Kurt Geiger today sells more than two million pairs of shoes a year, or 10 pairs every minute. In 2008, UK private equity house Graphite Capital led a £95m management buyout (MBO) of the business, which has since opened 20 stand-alone stores across the country and created more than 600 new jobs. And, despite the recession, recorded a 17% increase in turnover and a 21% increase in earnings in 2009. Strategy With the help of Graphite’s expertise in the retail sector, the MBO offered Kurt Geiger the opportunity to grow both nationally and internationally across all its distribution channels. In the UK the business had identifi ed a roadmap for rolling out its highly successful ownstore model to additional high street and airport locations. There was also strong scope to strengthen the company’s existing partnerships with premium department store groups where Kurt Geiger operates all aspects of the multi-branded shoe departments. The company’s international footprint was still relatively limited at the time of the MBO, meaning there was an opportunity to target new territories. Other business areas, such as licensing and online sales, were underdeveloped and offered potential for growth. Achievements Since the MBO, the group has opened over 20 stand-alone Kurt Geiger stores in the UK, including a new fl agship concept store in Covent Garden. Under Graphite’s ownership, the company has won a number of new contracts, including further selling space within the Selfridges and Fenwick’s store groups as well as a new contract with Debenhams. It has also signed an exclusive UK distribution agreement with Nine West, a US-based footwear brand. Internationally, it has expanded its franchise agreement in the Middle East, with stores opening in Dubai, Kuwait, Qatar and Bahrain. More recently, it has signed agreements with franchise partners in Russia, Turkey and Malaysia. Performance Despite the challenging economic backdrop for retailers, Kurt Geiger has performed strongly, thanks to its focus on luxury and premium product, geographic spread and multichannel, multi-brand business model. EBITDA (earnings before interest, taxes, depreciation, and amortization) has risen by more than 20% in each of the past two fi nancial years to a record £14.7m in the year to January 2010. Like-for-like sales have risen strongly, with designer shoe sales within department store partners Harrods, Selfridges and Liberty at a record high. Internet sales trebled and now account for 15% of own brand sales. Job creation Kurt Geiger has created more than 600 new jobs since its acquisition by Graphite in January 2008, refl ecting the rapid expansion of its sales channels and international penetration. With original design as a core principle, the group has more than doubled the size of its design team since the MBO. Investor: Graphite Capital Location: London Sector: Retail Stage: MBO-2008 Exit: Currently in portfolio Company Website: www.kurtgeiger.com Investor Website: www.graphitecapital.com “We were impressed by Graphite’s strong track record of successful investments in retail and consumer businesses. We offer some of the world’s best shoes in an unrivalled retail environment and are well recognised for the quality of our range and the high standard of our customer service. With Graphite’s retail expertise and support we are pursuing our strategic objective of becoming the leading global luxury and premium shoe retailer.” Neil Clifford, chief executive, Kurt Geiger January 2011 BVCA Briefing 33
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