What sectors do you see becoming more competitive over the next year or two?
We’ve seen enormous competition in logistics and distribution businesses. Businesses that have the flexibility and creativity to succeed in the global environment will be competitive. You’ll also see more competition in industries where people can take advantage of the different international marketplaces, whether it’s through outsourcing or through finding customers. Those are industries where you can increase the value of the business and have a high impact on your investment. Businesses that are tied to one particular marketplace or one particular factory have a millstone around their neck and the ability to change is much less.
Family offices comprise the lion’s share of your LP base. Does this make your investment style unique?
Your style of investing is different when you come from a background of investing capital from family offices. You take less of a portfolio approach with your investments. Institutions take much more of a diversified portfolio approach. Family offices are concerned with the integrity and values, not only of the investment manager, but of every company and management team you deal with. It’s not just about the potential for profit. Family offices care about their reputations more than about making more money. As an investor of family money, one always has to keep that in the front of your mind. It’s a different style of investing.
Do you think that buyout funds are getting too large?
There are numerous buyout funds of $1 billion and more and it’s reached a point where they’re starting to act like venture funds. To deploy all the capital that they’ve raised they’re putting clubs together. That’s something that certainly didn’t happen five or 10-plus years ago. If you over-leverage it, if you do a recap to take some money out, you cut back marketing expenses or don’t focus on the company’s operations: that’s when it ends badly.
Are we in the middle of another buyout bubble? If so, when will it burst and how bad will it be?
There is a lot of liquidity in the system and we believe lenders are over-leveraging businesses and certain funds are paying prices that we are certainly not prepared to pay. The key in this market is to be disciplined in your price, prepare for an economic downturn in the business you’re buying and invest behind quality managers.
What is your view of the enthusiasm among private equity firms for involvement in China?
We live in a global market. Even smaller middle market businesses need to understand what is going on outside of North America. The China question affects middle market buyout funds as much as it affects the large cap companies and the larger funds. I find it quite fascinating to watch this rush to China. We’re clearly focused on the threat that China poses to our portfolio companies or to businesses in which we’re looking to invest, but equally we’re focused on the opportunities that our own contacts and knowledge of China can bring to bear. The China angle needs to be assessed in all transactions.