When investors look at public markets today, many see high current valuations, low expected returns and a likelihood of increased volatility. Against this backdrop, it’s little surprise that more than a few are increasing their focus on private markets, and on private equity specifically. Their interest is amplified by a shift in the public-private balance of company ownership. With more companies going private or staying private for longer, allocators who want to be invested in growth over the next decade have even more reason to consider private equity.
There are several ways for institutional investors to access private equity today, including the traditional route of being invested in GP/LP structures; co-investments alongside those structures; and secondary markets. As private equity matures and investors’ needs evolve, the need for innovation increases — setting the stage for a direct, flexible-hold strategy, aimed at better alignment among GPs, LPs, and portfolio companies to maximize value and capital appreciation.
This II interview with BlackRock’s Colm Lanigan, Co-Founder, Managing Director and Senior Investor, Long Term Private Capital, focuses on value creation in such a strategy, and is one of a three-part series on creating persistent alpha in private equity.
You are a founding partner of a flexible-hold private equity strategy. There’s a perception among some people that such a strategy is a form of hands-off, passive private equity ownership. Do you see it that way?
Not at all. There’s almost nothing passive about private equity. In the private markets there is much greater disparity across both scale and quality, so the whole screening process is, itself, active. In addition, fees are not the differentiator between alpha and beta in private equity. They’re part of it, but a much bigger part of alpha generation is the active management of the business, active governance, and value creation — regardless of the time frame, shorter or longer.
There have been approaches to longer-term investing in private equity that focused on asset selection as the number one indicator of earnings over a longer period, and then used the long holding periods to achieve something resembling private equity multiples, though not alpha. But those approaches have focused on assets that are infrastructure-like or on asset-intensive businesses with stable earnings, as opposed to businesses that can drive private equity IRR and multiples over long periods of time. There’s a big difference between the two, and the key to the latter is still active management of the business and active governance to drive return on invested capital (ROIC) and growth.
You’re an advocate of the importance of persistent private equity returns. What are the keys to achieving them?
I think what we’ve learned is that good companies often remain good companies as long as they are effectively managed. The business model matters – do they have a slightly better mouse trap? – as do other things, such as having better gross margins than their competitors. But it really comes down to superb management teams who think and act like company founders, and who unfailingly and unwaveringly focus on execution of the plan and the strategy that they know makes their companies successful. And part of that founder mindset is rigor around capital allocation. Favorable market positioning from differentiated business models, durable economics, and seasoned management teams with disciplined strategy execution are what drive ROIC, and those companies succeed for longer periods of time. Sponsors covet those types of companies because they know they have the potential to make them even more successful.
What do you see as the most important aspects of a value-creation plan?
Developing a value-creation plan begins with identifying the fundamental variables that drive the business’ success. You’re looking for no more than five such points that allow you to focus management practices and create continuing value. For example, operational excellence is one, and it’s a must-have for every successful business. Drivers of scale are another. Which elements of the business are on the right side of pervasive disruption is another, so you can focus your efforts on the greatest opportunities for growth. A final one should be your digital strategy — it’s imperative that it supports your day-to-day analytics so you can make the right decisions in an environment that’s moving faster, and is tougher to navigate, than ever.
When you focus on those few things that matter the most, you don’t overstretch your organization, and you can match capabilities with goals and incentives. People’s behaviors are shaped by incentives and associated performance metrics. If employees know that you are focused on — and measuring — the right things, and that’s how they’re going to be compensated from top to bottom in the organization, you have all the ingredients of success.
Are there any special considerations that come into play in a late-cycle climate?
Having managed through a couple of cycles, I would mention several.
You need to be careful about leverage, which instead of adding to your returns can very easily subtract from them when the cycle turns. And you have to be wary of deals that have a lot of execution risk — for example, from moving plants or expanding margins. If you haven’t built in a recession scenario, you’re probably playing with a little bit more risk than you anticipated. Looking left on the return curve — thinking about what could go wrong and factoring that into your due diligence and underwriting — is probably even more important right now than looking to the right.
In good times, extra volume through a business can hide a lot of inefficiencies and problems. It has been a little easier to take lower-confidence bets when you’ve had margin expansion due to 12 years of economic prosperity and growth that’s higher than trend. Multiple expansion has been a major driver of returns in the deals done since 2010. You’d be on shaky ground if you relied on that continuing. It may, but it’s less likely than before.
If it looks like the business will be tested by an economic trough, it is key to focus on the fundamental business variables that generate lasting value and to position for growth. That can help generate a couple of quick wins to build confidence throughout the organization and put you in a slightly better position going into what could be a tougher period.
A robust capital structure is a big plus. Private equity is a long option, and if you have a capital structure that can withstand some of the hiccups, you’ll come through the other side. I would focus a little more on the balance sheet in this environment, too. If you have enough capital available, you’re in position to be the consolidator of your weaker competitors over time.
Of course, human capital is perhaps the most important element of all. To achieve long-lasting success, there is no substitute for having the right people and forging the right partnerships.
For more information, please click here.
© 2019 BlackRock, Inc. All rights reserved.
Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.
This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are subject to change. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.
This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any BlackRock Funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.
In the U.S., this material is for Institutional use only – not for public distribution.
In Canada, this material is intended for permitted clients only, is for educational purposes only, does not constitute investment advice and should not be construed as a solicitation or offering of units of any fund or other security in any jurisdiction.
In the United Kingdom and the European Economic Area, this material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. In the event where the United Kingdom leaves the European Union without entering into an arrangement with the European Union which permits firms in the United Kingdom to offer and provide financial services into the European Union (“No Deal Brexit Event”), the issuer of this material is: BlackRock Investment Management (UK) Limited for all outside of the European Economic Area; and BlackRock (Netherlands) B.V. for in the European Economic Area, however, prior to a No Deal Brexit Event and where a No Deal Brexit Event does not occur, BlackRock Investment Management (UK) Limited will be the issuer. BlackRock (Netherlands) B.V.: Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Trade Register No. 17068311. For more information, please see the website: www.blackrock.com. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock (Netherlands) B.V.
For qualified investors in Switzerland, this material shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended.
For investors in Israel: BlackRock Investment Management (UK) Limited is not licenced under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder.
DUBAI DFSA ISSUE This information can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited - Dubai Branch which is regulated by the Dubai Financial Services Authority (“DFSA”) and is only directed at ‘Professional Clients’ and no other person should rely upon the information contained within it. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. This information and associated materials have been provided to you at your express request, and for your exclusive use. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution would be unlawful under the securities laws of such. Any distribution, by whatever means, of this document and related material to persons other than those referred to above is strictly prohibited.
In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.
In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. This material is for distribution to “Professional Investors” (as defined in the Securities and Futures Ordinance (Cap.571 of the laws of Hong Kong) and any rules made under that ordinance.) and should not be relied upon by any other persons or redistributed to retail clients in Hong Kong.
In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N) for use only with institutional investors as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
In Korea, this information is issued by BlackRock Investment (Korea) Limited. This material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations) and for information or educational purposes only, and does not constitute investment advice or an offer or solicitation to purchase or sells in any securities or any investment strategies.
In Taiwan, Independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600.
In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services.
Issued in Australia and New Zealand by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL) for the exclusive use of the recipient who warrants by receipt of this material that they are a wholesale client and not a retail client as those terms are defined under the Australian Corporations Act 2001 (Cth) and the New Zealand Financial Advisers Act 2008 respectively. BIMAL is the issuer of financial products and acts as an investment manager in Australia. BIMAL does not offer financial products to persons in New Zealand who are retail investors (as that term is defined in the Financial Markets Conduct Act 2013 (FMCA)). This material does not constitute or relate to such an offer. To the extent that this material does constitute or relate to such an offer of financial products, the offer is only made to, and capable of acceptance by, persons in New Zealand who are wholesale investors (as that term is defined in the FMCA). This material has not been prepared specifically for Australian or New Zealand investors and may contain references to dollar amounts which are not Australian or New Zealand dollars and financial information which are not prepared in accordance with Australian or New Zealand law or practices.
For Other Countries in APAC, this material is issued for Institutional Investors only (or professional/sophisticated/qualified investors, as such term may apply in local jurisdictions) and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
In Latin America, for Institutional Investors and Financial Intermediaries Only (Not for public distribution). This material is for educational purposes only and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. It is possible that some or all of the funds mentioned in this document have not been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America.
In Argentina, only for use with Qualified Investors under the definition as set by the Comisión Nacional de Valores (CNV).
In Chile, the offer of each security not registered with the Comisión para el Mercado Financiero (“CMF”) is subject to General Rule No. 336 issued by the SVS (now the CMF). The subject matter of this offer may include securities not registered with the CMF; therefore, such securities are not subject to the supervision of the CMF. Since the securities are not registered in Chile, there is no obligation of the issuer to make publicly available information about the securities in Chile. The securities shall not be subject to public offering in Chile unless registered with the relevant registry of the CMF.
In Colombia, the offer of each Fund is addressed to less than one hundred specifically identified investors, and such Fund may not be promoted or marketed in Colombia or to Colombian residents unless such promotion and marketing is made in compliance with Decree 2555 of 2010 and other applicable rules and regulations related to the promotion of foreign financial and/or securities related products or services in Colombia.
In Mexico, for institutional investors and financial intermediaries only. Investing involves risk, including possible loss of principal. This material is provided for educational and informational purposes only and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security. It is your responsibility to inform yourself of, and to observe, all applicable laws and regulations of Mexico. If any funds, securities or investment strategies are mentioned or inferred in this material, such funds, securities or strategies have not been registered with the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, the “CNBV”) and thus, may not be publicly offered in Mexico. The CNBV has not confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico, subject to strict rules, and performed under the supervision of the CNBV. BlackRock Mexico, S.A. de C.V., Asesor en Inversiones Independiente (“BLKMX”) is a Mexican subsidiary of BlackRock, Inc., registered with the CNBV as an independent investment advisor under registration number 30088-001-(14085)-20/04/17, and as such, authorized to provide Investment Advisory Services. BlackRock México Operadora, S.A. de C.V., Sociedad Operadora de Fondos de Inversión (“BlackRock MX Operadora” and together with BLKMX, “BlackRock México”) are Mexican subsidiaries of BlackRock, Inc., authorized by the CNBV. For more information on the investment services offered by BlackRock Mexico, please review our Investment Services Guide available in www.BlackRock.com/mx. This material represents an assessment at a specific time and its information should not be relied upon by you as research or investment advice regarding the funds, any security or investment strategy in particular. Reliance upon information in this material is at your sole discretion. BlackRock México is not authorized to receive deposits, carry out intermediation activities, or act as a broker dealer, or bank in Mexico. For more information on BlackRock México, please visit: www.BlackRock.com/mx. Further, BlackRock receives revenue in the form of advisory fees for our mutual funds and exchange traded funds and management fees for our collective investment trusts.
In Peru, this material is for the sole use of Institutional Investors, as such term is defined by the Superintendencia de Banca, Seguros y AFP.
The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.
FOR INSTITUTIONAL, FINANCIAL PROFESSIONAL, PERMITTED CLIENT AND WHOLESALE INVESTOR USE ONLY. THIS MATERIAL IS NOT TO BE REPRODUCED OR DISTRIBUTED TO PERSONS OTHER THAN THE RECIPIENT.
BlackRock® is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
MKTGH1119U-1010545