The co-founder of SVPGlobal has teamed up with a longtime Harvard Business School professor to start a firm focused on bringing a private equity investment strategy to the public markets.
On Monday, Jean-Louis Lelogeais — who founded SVPGlobal alongside Victor Khosla in 2001 — and HBS senior lecturer Randolph Cohen announced the launch of PEO Partners, a private equity liquid alternatives firm. PEO aims to replicate average private equity returns using publicly traded companies, and is targeting individuals who can’t access private equity investments and institutions who need liquidity in their private equity allocation.
The firm selects Russell 3000 companies in the industries that leveraged buyout funds focus heavily on. Right now, for example, that’s healthcare. “Private equity is very smart about picking industries,” Cohen said. “Within each industry, we buy the LBO-able companies.” By “LBO-able,” Cohen means companies that have high profitability, high payout ratios, and low multiples.
The firm began investing in May 2021, although its proprietary strategy has long been in the works.
Cohen, who, along with Lelogeais, spoke with Institutional Investor on Monday, said that he began thinking through a strategy that would mimic private equity’s strong returns and muted drawdowns, but without some of the asset class’s downsides, back in 2000. “There are two challenges with private equity — liquidity and access,” Cohen said. Certain investors are unable to access private equity investments, while those that can have their capital locked up for long periods of time — sometimes without even being invested — as they await capital calls.
Cohen and Lelogeais later met at a conference, and as they got to know each other, Cohen said he felt like they were “kindred spirits.” A decade and a half after that initial meeting, the two men launched PEO Partners.
Now, the duo is working to raise additional capital for their global fund, which will target institutions, high-net-worth individuals, and family offices. They are continuing to act as a non-discretionary subadvisor for the Private Equity Replication mutual fund launched in December 2020 by Canadian asset manager Mackenzie Investments. Other managers have public vehicles to provide private equity-like returns to investors, including DSC Quantitative Group and Verdad.
Because PEO operates in the public markets, it can’t do everything private equity firms do. It can’t change the way a company operates — PEO Partners is not an activist investor. But Cohen noted that there are high costs, including deal premiums that come along with being a private market investor, that PEO can avoid.
“We buy what they buy, lever like they lever, and the last piece is that we protect the downside, just as private equity does,” Cohen said.
But the way the firm protects its downside differs too. “They can use mark-to-model accounting,” Cohen said of private equity firms. “We can’t do that. We’re holding public securities, so we have to mark them at the market price.”
Instead, PEO Partners employs a hedging strategy that uses S&P put options to reduce downside volatility. And as they’ve gone out to raise capital, they’ve discovered that that hedge is exactly one of the things that investors find attractive. “We think that the timing is pretty good, because a lot of the capital [allocators] we’ve attracted [are] very worried about a crash,” Lelogeais said. “One of the things they focus on is not just that it’s liquid private equity. They see the hedge we have — it’s very strong.”
