"Our database tells us we're in a multigenerational opportunity to be a private equity investor," said Martin Grasso, CEO of Pearl Street Capital Group, a private equity fund-of-funds manager. He believes that investors with longer time horizons can get above-benchmark returns without significant volatility. Grasso made his comments as a panelist on "The State of Private Equity: Opportunity Through Crisis," presented to the Boston Security Analysts Society on November 5.
Data suggests that capital growth and buyout private equity get the highest returns in years with the lowest levels of EBITDA leverage, said Grasso. That's the situation we're in now.
It also pays to invest with the best, according to Grasso. Top quartile and top decile private equity fund managers show much higher levels of persistence than long-only public securities managers. In other words, top performers in private equity have a greater tendency to remain top performers. The difference in performance between top and bottom quartile managers is much greater in private equity than among public equity managers.
Implications for advisors:
* Access to top firms is still difficult, so go with a fund-of-funds to gain that access.
* Invest in 10 vintage years and consider some secondary offerings, which are available now that some investors can't meet their funding obligations as limited partners.
* Best private equity opportunities now are in small-medium companies where there's less competition and where private equity managers are more inclined to partner with management to "accrete value" and make minority investments.
* Diversify across geography and sectors.
The last two paragraphs of this post were revised on Dec. 7, thanks to some clarifications by Martin Grasso of Pearl Street Capital Group.
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Susan B. Weiner, CFA
Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.
Copyright 2009 by Susan B. Weiner All rights reserved
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Good post, Susan. I would concur with your observations. The combination of de-leveraging balance sheets and the recession has created a rare window for private equity in middle market companies--without question one of the best opportunities in decades.
ReplyDeletePrivate equity returns from current vintages will be coming in very poorly over the next couple of years as debt, leverage and the recession will have taken its toll.
Ironically, that will deter investors from PE at a time that they should be embracing it.
Jeff
www.venturepopulist.com