Braced for the rollercoaster

In recessions of the past, private equity has often proved itself capable of adapting to market environs. This recession will test the industry in an unprecedented manger, but SL Capital isn’t worried – quite the reverse.

SL Capital – the private equity arm of Standard Life – has raised a total of £6.2bn in private equity assets, and sees over 150 funding proposals a year. EVCJ speaks to CEO David Currie who is confident the rocky ride ahead will ultimately prove to be a fruitful one.

What is SL Capital Partners’ investment strategy?

Our investment strategy is to maximise investment returns, while minimising risk. To achieve this, we use a proven strategy of investing in leading private equity funds and co-investing in direct investments with fund managers carefully selected by SL Capital.

As a leading investor in private equity funds, we concentrate on buyouts, historically in Western Europe but more recently in North America. This has been a winning strategy since we have been active in private equity. By focusing on buyouts, we invest only in established businesses with products, customers, revenues and cash flows. We will also purchase secondary positions in funds where these have the clear potential for investment outperformance. This approach, combined with our wealth of experience, has allowed us to generate excellent returns for our clients.

We have a proactive management style to identify the leading fund managers and opportunities for investment in funds and co-investments. Portfolios are diversified by country, size of investment and industry sector, and include: pan-European funds; pan-regional funds; country specific funds; and North American funds.

Co-investments are a key part of our strategy and an important differentiator. We only make co-investments alongside our chosen fund managers. These co-investments are typically made in companies that have the potential to give an investment performance that is better than the portfolio average, and with lower costs and charges, thereby enhancing the overall performance of the fund.

How many funds do you look at per year and how many do you invest in?

It varies from year to year. However across our European and North American funds we typically receive anything up to 170 PPM’s (Private Placement Memorandums) a year, perform initial due diligence on up to 50 funds and invest in six to seven funds per year in each of Europe and the US.

We have a strong deal flow of co-investments – again the number varies from year to year but we could be offered anything up to 30-35 co-investment opportunities (excluding follow-on investments) and invest in around five to six per year in each of Europe and the US.

How is your asset allocation split?

SL Capital continues to believe that private equity exposure to medium (transaction size of €100m to €1.5bn) to large buyouts represents an excellent investment opportunity. We remain cautious on investing in early-stage venture but regularly review opportunities in this segment of the market.

In geographical terms we have historically specialised in Europe, in particular Western Europe, but we have a growing presence in North America.

What is your stance on investing in emerging markets?

We do not, and have not previously, invested in emerging markets but we do review the opportunities from time to time.

How much contact do you have with your GPs, and what form of contact does this take?

SL Capital has regular interaction, both formally and informally with its GPs and undertakes comprehensive monitoring, review and analysis on fund performance. Continual evaluation is performed through regular contact, on-site visits, active representation on the advisory boards and periodic review to verify compliance with the investment strategy, terms and conditions. SL Capital sits on advisory boards of more than 90% of funds held within SL Capital fund-of-funds limited partnership vehicles.

SL Capital attends all formal annual and semi-annual (if any) meetings for each manager. We are generally in contact with all managers on at least a monthly basis.

What tips would you give to GPs currently fundraising?

Current fundraising conditions are very difficult with many LPs over allocated to private equity due to the denominator effect and lack of liquidity. Many are also nervous about making new commitments at this time for both internal and external reasons.

It is likely that fundraising timelines will extend and funds will have multiple closes over several months: in effect a reversion to normal conditions.

GP’s should ensure their fund terms are competitive and as investor friendly as possible to help make the decision easier for potential investors. Investors will also be concerned if a manager is returning to fund raise after only two or three years as their current fund will be immature, have little or no realisations and may have bought companies at the top of the market. These factors make it more difficult to assess performance and investment discipline.

In light of the banking crisis, how do you think the private equity industry will cope?

The private equity industry, specifically the buyout industry, has historically found many attractive opportunities during economic downturns. The banking crisis has set in motion the first real recession for more than 15 years. Therefore there will be some very attractive opportunities during the next two years or so.

Clearly the lack of debt will be an issue but this will also force down entry valuations to an attractive level. Some portfolio companies will also fail so managers who can genuinely add value to their investments will come to the fore.

At present it is difficult to see in the short term how very large buyouts would be funded but the industry has a history of innovation in terms of sources and structures of debt.

For the private equity industry all this is likely to mean longer hold periods for current portfolios and more time spent on current investments rather than seeking new investments or exits.

In summary, while the current market conditions and shortage of liquidity will prove difficult in the short term, with hard work and vigilance private equity is well positioned to take advantage of the current opportunities, and the upcoming vintages could well prove fruitful, especially if the previous downturn is anything to go by.

Has the economic turmoil affected your strategy?

Our strategy has been tried and tested and found to be robust in previous downturns and therefore remains unchanged by the current economic climate. We continue to focus on investing in high quality managers with a strong operational focus and a proven ability to create value in investee companies. Our consistent investment strategy is one of the strengths of our business. Even during the tech bubble our strategy remained the same.

What is your focus for the year ahead?

We will be keeping a close eye on our portfolio, not just the managers we have invested into but the underlying companies themselves, and in particular our portfolio of co-investments, to ensure that they get through these challenging times. We believe deployment of capital will be at a slower rate than it has been over the last couple of years but we expect to continue making commitments to a selection of high quality managers.

Our fund-raising for ESP 2008, which has already reached €577m, will continue through to a final close in spring 2009.

What issues do you think the private equity industry needs to be most concerned about in the coming months and years?

In the short term the private equity industry is likely to be facing the challenges of dealing with a low growth, recessionary environment, with the added issue of very limited debt availability.

Operationally, it is likely that private equity managers and the underlying management teams will have to work especially hard on their businesses to maintain earnings performance, particularly in industries driven by consumer confidence. Holding periods for recent and current vintages will extend unless there is a sudden U-turn in market conditions and the IRR on investments is likely to be lower albeit that the money multiple may be higher.

Longer term the continued education of the public as to the benefits of private equity ownership is important as public perception of the industry remains generally sceptical, despite the significant value that private equity adds to the economy.

Finally, investor confidence also needs to be restored to the belief that private equity can produce strong, long-term performance.

David Currie

David Currie is the chief executive of SL Capital Partners. He has more than 28 years experience in private equity investment, starting with 3i and, immediately before joining Standard Life, with the Abu Dhabi Investment Authority (“ADIA”) where he ran their private equity programme, investing throughout Europe.

Since joining Standard Life in 1998 David has played a major role in launching and successfully establishing Standard Life Investments (Private Equity) Ltd (“SLIPE”) as a leading private equity fund of funds manager. On 1 October 2007 the business of SLIPE was transferred to a new vehicle, SL Capital Partners LLP (“SL Capital”). Together with 8 other senior investment executives, David Currie became a partner in SL Capital. SL Capital has a total of €6.2 billion under management from over 140 clients in 25 countries

The primary focus of all SL Capital’s investment vehicles in Europe and America is buy-out transactions (both fund investments and co-investments).

David’s experience includes management buy-outs, expansion capital and early stage and start-up investments. He has extensive experience as a non executive director and as a member of the Advisory Board of a number of private equity funds.

SL Capital Partners

SL Capital Partners is a subsidiary undertaking of Standard Life Investments (SLI), specialising in private equity. We offer private equity investment through fund of funds limited partnerships, bespoke arrangements and a listed private equity trust – Standard Life European Private Equity Trust PLC. Our clients range from leading institutional investors in the UK, US, Canada and Europe, to family offices and high net worth individuals globally. To date we have raised a total of approximately €6.2bn in private equity assets from clients in 25 different countries. More than 75% of our assets under management come from third party investors.

Standard Life has invested in private equity funds and co-investments for more than 25 years. Standard Life Investments (Private Equity) Limited (SLIPE), the forerunner to SL Capital, was formed in 1998 when the first private equity fund of funds product was offered to third party investors.

In October 2007, SL Capital was formed. SL Capital is owned 60% by SLI and 40% by nine partners of SL Capital.