Verus

“OUR FOCUS REMAINS TO IDENTIFY THE GROUPS THAT HAVE A FUNDAMENTAL REASON TO ACQUIRE A COMPANY AND REALLY IMPROVE IT; THEY PLAY AN ACTIVE PART IN THIS AND HAVE OPERATING NETWORKS IN PLACE TO MAKE THE COMPANY GROW. ”

CHRIS SHELBY

DIRECTOR, PRIVATE MARKETS, VERUS

We deploy a little over USD2-3 billion per annum across private markets, including private credit, private real assets, real estate, and private equity (which also comprises venture capital and growth capital). Private equity is always topical with our clients, but often for differing reasons. Leading into the pandemic, interest in private equity was very high because we were seeing expected returns of the traditional markets continuing to decline, and a very low interest rate environment, as well as liquid equity markets which have remained strong over the past decade.

Within buyout and venture capital strategies specifically, we have witnessed a rapid increase in exposure to technology-based companies, given their prevalence across many end markets. In some cases, this has debatably resulted in an overweight to technology. We are aware of this exposure and in many cases are seeking to find opportunities that may be less correlated to the valuation factors of technology companies. Our focus remains to identify the groups that have a fundamental reason to acquire a company and really improve it; they play an active part in this and have operating networks in place to make the company grow. Private credit is an area where we’ve seen a tremendous amount of interest, in part because of the lower interest rate environment and tight spreads offered in the traditional fixed income markets. Portfolios that entered the space as a yield enhancement to traditional fixed income are looking to broaden their exposure to a diversified mix of strategies. These may include more opportunities strategies, as well as those that may offer an element of diversification from a collateral perspective. As many clients have grown to include distressed debt strategies within a private credit portfolio, we’ve found that this space may experience headwinds due to the tremendous amount of additional capital that has been allocated to the space in recent years, combined with the somewhat benign market conditions. Opportunities remain in strategies seeking to provide transitional or situational capital to companies that may be suffering from an idiosyncratic event.

Private credit portfolios are also considering more niche and possible credit-like strategies including royalty-based strategies, litigation finance strategies, portfolio finance, and various other real asset lending strategies. These typically have very different return and risk profiles from traditional corporate-focused strategies but may offer an enhanced level of diversification at the portfolio level.

With regards to ESG, these standards are incredibly important to Verus and to our clients. We integrate an ESG evaluation into the initial screening of private markets firms, followed by a thorough review in further diligence. However, we’re aware that you must be wary with ESG, because many will approach the topic and claim to adhere to the principles, but ultimately their portfolios may not back this up. Additionally, sound adherence to ESG standards does not necessarily result in the achievement of excess returns, therefore the diligence process must balance the ESG review with other investment criteria.

CHAPTER FIVE

ESG