Private Equity skills pay off publicly

Success based on private equity disciplines is prompting SVG Advisers, the fund advisory business of London-listed SVG Capital, to set an ambitious target for its second Strategic Recovery Fund (SRF). The concept is fairly new in Europe, although similar propositions are more widespread in the US.

“Our approach within the SVG Advisers public equity team has been to apply similar techniques to investment that have served private equity firms so well in recent years,” said Tony Dalwood, head of public equities at SVG Advisers. “The performance of the SRF to date has demonstrated the validity of this approach.”

Dalwood said the follow-on fund would launch this year with a £200m target, representing a sizeable increase from the £15m fund that has delivered compelling results a year after launch in December 2003. It has since notched up a 64% return on capital and a net IRR of 68%.

The rationale behind the £15m fund was to invest in public companies where there was potential to increase value through strategic, operational or management change. Performance was generated across a focused portfolio of six companies.

The investment leant heavily on practices and techniques imported from private equity. While mainstream fund managers focused on index-related returns for much of the 1990s, private equity achieved success based on absolute returns. SVG incorporated this rationale into its initial SRF and emulated buyout firms’ focus on cash as opposed to technical valuations.

SVG also took note of buyout houses’ due diligence process. Buyout firms are noted for looking deeper than just mere numbers, often bringing in technical experts to drill down into valuations that appear cheap on the surface.

The second fund will target institutional as well the individual investors, who subscribed the first vehicle in its entirety. Dalwood said the fund might complement private equity investing. “Once investments have been made, it may be appropriate for private equity to become involved in those companies,” he said. “As part of our investment process, we incorporate private equity views and strategy.”

SVG has £150m in public equity assets under management. Its private equity business advises on €1.6bn of SVG’s own assets and €1.4bn of third-party funds and commitments. At June 30 2004, SVG Capital had holdings valued at £621m and uncalled commitments of £529m to 23 private equity funds managed or advised by Permira or Schroder Ventures.