Bring us up to date on the latest and greatest at Capital Dynamics?
We’re clearly busy on the investment side of the business in terms of a lot of fundraising going on at the moment with the funds we may invest in. It’s a very quick fundraising environment in some instances. A well-established manager with a good track record can and does raise very rapidly. You have to act quickly to do the due diligence.
Any exciting prospects for investments in middle-market and lower middle-market GPs in the U.S.?
We think there’s going to be some distressed opportunities coming up. When you look at the level of debt in investments, inevitably there will be some stressed opportunities in the market. Distress is the one thing we market-time. We don’t generally do that in private equity. If you track the amount of debt, it’s approaching levels we saw in 2006 and 2007. We think there are still opportunities in distressed debt and turnaround opportunities coming. We believe there will be good opportunities in upstream energy-focused companies.
Could you share any lessons from past troubles either in the overall private equity industry or in your own experience?
Things will always go wrong. What we learn from it is more important. That applies to managers in which we invest. It’s a question of what they learned and what they did to correct it and work through it, and if they’re able to turn it around. Generally in this industry you learn more from what goes wrong than what goes right.
Could you share any details on your separate accounts business?
This is something we’ve been doing for the past 20 years. What we’re seeing in the industry is LPs are larger and more sophisticated and they want to have a separate account on their own. About two-thirds of our business is separate accounts. Funds-of-funds are still an important part of the business because new entrants don’t want to make a typical separate account commitment of about $100 million for three years. Funds-of-funds provide diversification for a reasonable cost. A new client in private equity could start with a fund-of-funds and then build up their expertise, and eventually move into a separate account. It’s a major part of our business and it’ll continue to grow.
What’s drawing your attention right now on the macroeconomic front?
Certainly Europe is a continuing focus for us. With the situation in Greece and the possibilities there, there’s clearly a lot of concern. We still think there are very good opportunities.
What we’re trying to do is mitigate some of the risks of what may happen in Europe by looking for managers that are not relying on European revenue. That’s very important. You talk to an Italian manger that has domestic Italian companies, but you’d be amazed at where those revenues come from – maybe 90 percent of their sales are coming from Asia. So you’re benefiting from growth elsewhere in the world. It’s important for U.S. companies to have international revenue as well. Overall, Europe is a concern but we’re trying to mitigate the risk. Asia has been an area that hasn’t delivered the returns we thought it would deliver, but you see that turning the corner.