European private equity investors have become more cautious during recent weeks following the collapse of Silicon Valley Bank and Credit Suisse. Appetite for alternative investments however remains strong while some investors embrace the “dislocation” in the market as an opportunity. “If you’re selective, you can even do better than expected.”
Delegates at the 0100 Conference Europe, Private Equity and Venture Capital event in Amsterdam on Wednesday heard buy-side speakers refer to tough market conditions, with an increasing concentration towards larger, established issuers and a market where business becomes harder for smaller, less-diversified firms. Speakers agreed the collapse of SVB is not necessarily bad news for PE investors.
“As a firm we are still very supportive of private equity strategies,” Dan Aylott, head of European private investments at Cambridge Associates, which advises institutional clients. “We believe in the long-term exposure of this asset class. We’re not seeing any pulling back in appetite but we see a more cautious approach on allocation. This year can be an interesting vintage year if you’ve got capital to deploy.”
‘Large gap left’
The demise of SVB has led to a shift in funding flows. Where US investors are moving their savings towards money market funds, banks are becoming reluctant to fund companies. SVB “has opened up a new need for capital in that area. There is a large gap left now banks are pulling back,” said Reji Vettasseri at Swiss asset manager Decalia. “It is harder for people relying too much on leverage.”
As a result of SVB, Aylott said Cambridge is adjusting the standard questions they ask funds and private firms in which its clients invest. “Generally speaking they’re on the macro environment, not only due to the banking crisis. Going forward we’ll be much more focussed on how disciplined managers are. How managers have managed portfolios, on exits, buying. But no fundamental changes in the way we do due diligence.”
Private market adjustments ‘not visible’
“It’s a bit tough out there,” said Gregor Rossen, senior portfolio manager alternatives at Aegon Asset Management, which holds several private investments ranging from 15-20 million euro to 100 million. “Multiples have adjusted in public markets and we expect an adjustment in private markets as well,” he said.
So far however, Rossen said, such an adjustment has not become visible in private investment valuations. “We need more time for that,” he said. “The SVB case shows it is good to have attention for some details that lurk in the dark.”
Roberto Violi, in charge of alternative investments at Banca d’Italia, Italy’s central bank, noted that the “dislocation” brought to the market by the collapse of SVB, and also Credit Suisse, has led to a new environment where risk needs to be assessed in a different, relatively cautious manner.
Risk budget
“If you’re selective, you can even do better than expected,” Violi told delegates. “The environment has become tougher. The main question is: why do you keep your budget unchanged? . Your capacity to absorb risk is used. Your risk budget is reduced. That is not risk aversion. When you’re proactive it means you are more cautious and you have to be more selective. You know that when there are dislocations there may be more opportunities for asset managers. If you manage to pinpoint them… there can be benefits.”
The Italian central bank is at the beginning of building an alternatives portfolio. Like most institutional investors, it considers private markets important for diversification of portfolios. Banca d’Italia invests in tickets of between 5 and 20 million euro, Violi explained, and so far has invested in a “very small” number of midcap and smallcap companies.
Dutch pension funds also are increasingly eyeing private investments. Dick Tol, senior portfolio manager at PGB Pensioenfondsen, described their approach as “small-mid-buyout strategy”. It includes investment tickets of 25 million euro in funds worth between 100 million and 1.5 billion euros. “Each fund gets the same commitment regardless of size,” Tol said.
Sustainability criteria
Institutional investors like Tol’s pension fund are increasingly applying sustainability criteria when determining which investments they make in their private equity portfolios. “Platform due diligence is always an important part of the process. Institutionalising, building businesses, implementing ESG policies in these former family owned companies is what we are looking for in these managers. How do they incorporate ESG. Do they set KPIs?. We’re 50-50 Europe-US. It’s a challenge to find managers in North America which relate to us on ESG. Often we help them set up ESG policies from scratch, helping them build it for their first European clients.”
“ESG and impact clearly is a theme,” said Cambridge’s Aylott. “It still is very much an emerging space, especially in terms of finding managers that have long-term track records.”
“For us the focus in alternatives is on increasing our impact,” said Aegon’s Rossen. “Our focus is more and more on impact and how you are reporting this, and how you are financing the transition.”
“Good managers will still be able to raise funds,” said Yolande van den Dungen, portfolio manager at SPF Beheer, which manages the pensions for Dutch rail and transport workers. “Maybe not as high as expected,” she said, adding that this could be “more healthy”. “We can still commit money.”
