CASE STUDY

Private Equity / Infrastructure Blend

Asian Pension Fund | Spring 2020

Engagement at a glance

Multi Asset Total Return

An Asian institutional investor was seeking to invest US$200-300 million in segregated fund-of-funds mandate that included exposure to both private equity (>80%) and value-add infrastructure (20%), with a target net return of 16-20% in USD terms. The geographical scope was “global”, but the investor was effectively neutral on region as long as other criteria were met.

Client-specific Concerns

The investor already had exposure to private equity and infrastructure (directs) in their portfolio; this search was part of a strategic move to increase exposure to illiquid investments. The combination of both private equity and value-add infrastructure in one mandate – which stemmed from a need for governance simplicity – made this project somewhat unusual.

Other specific considerations included: minimal use of fund and investment-level leverage (although the investor was ultimately willing to contemplate some leverage, particularly on secondary transactions) and prohibition of natural resources, upstream and commodities. In addition, venture capital exposure was not preferred but could be considered on a case-by-case basis.

Notably client had been disappointed by some previous experience in private equity and explicitly sought a fund-of-funds partner who would genuinely be able to provide access to ‘top quartile’ managers.

Outcome

  • A clear strategy for accessing ‘top quartile’. With quite an aggressive unlevered return target in view by industry standards, the client saw access to top-quartile GPs as an essential outcome. Analysis confirmed that Fund-of-Funds strategies in several markets (including U.S. buyout) have indeed proven to be an effective means, during recent years, of accessing GPs that subsequently give top-quartile performance. The fundraising climate has been extremely competitive, limiting the universe of options for investors, and some boutiques have been working exclusively with larger Fund-of-Funds. Analysis focused on each manager’s approach to fund due diligence and careful consideration of the unique differentiators in their respective processes.

  • Understanding experience through downturns. Given the ongoing impact of COVID-19 at the time of the search, a significant amount of research effort was devoted to examining each manager’s track record and experiences through falling markets. This analysis was both qualitative and quantitative, with a focus on metrics such as loss ratios (private markets), standard deviation and maximum drawdown (public market equivalents). It is helpful to appreciate the lessons that managers have learned from historical crises and how this has helped to shape their current approach.

  • Better alignment on fees. Within a segregated mandate, management fees and performance fee structures can be adjusted to improve alignment between LP and GP. A variety of tiered carried interest structures were proposed in order to strike the right balance between the client’s best interests and GPs’ expectations.

Our specialist says

  • While there has been a recent rise in demand for ‘multi asset’ private markets strategies, it is still relatively unusual for large institutional clients to seek both private equity and infrastructure in one mandate. Casting a wide net among managers who may have the appropriate underlying capability to create this type of approach through an SMA helped to encourage innovation and open up a variety of options for the client to consider. Indeed, the long-list would have been considerably longer if the return target had been lower.

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