LP INVESTMENT PLANS How will you be thinking about generalists versus sector specialists as part of your investment programme in 2021? And to what extent will you be considering emerging managers relative to established names? HELEN LAIS & MARK DRUGAN MERRICK McKAY
Managing Director & Head of Primaries, US;
Head of Europe – Private Equity, Aberdeen Standard Investments
Managing Director & Head of Primaries, Europe,
Every manager we back brings something to the table that, in our view, gives them a sustainable and significant competitive edge in being able to generate strong risk-adjusted returns in their markets and for our portfolios. More often than not, this will be seen in strong single or multi-sector expertise, but it may also be demonstrated in “generalists” having strengths in sourcing angles (such as country-focused funds) and/or widely-applicable value creation skills. Undoubtedly however, we are increasingly focusing on sector specialists for our client mandates and funds for two reasons: we look to construct our portfolios on a thematic and sectoral basis with a geographic overlay (rather than the other way around); and sector specialisation has moved further down the GP/ fund size range, with numerous sector specialists now operating in the mid and small cap space, making it easier for us to construct portfolios in this way (rather than relying on the sector discretion of generalists to some degree). We are active investors in emerging managers (in addition to established managers), and see no reason why 2021 should be any different. We have observed some investors pulling back from this area during 2020, at least partly due to reduced capital to deploy and a premium being placed on known entities, and it is difficult to forecast whether this will continue in 2021. Fortunately, we manage multiple mandates, many of which rely on us identifying the ‘stars of tomorrow’, which is a role we relish. Hopefully 2021 will be an easier environment to work in this area though – 2020 saw us make our first commitment to a first time fund, where (still) none of us have physically met the team!
Capital Dynamics
PRIVATE EQUITY GLOBAL OUTLOOK REPORT | Jan 2021
In Europe, we are seeing more genuine sector expertise in sector-focused funds; this has been already evident in the US over decades in some cases. Nevertheless, generalists/opportunists are not an extinct breed and we do not expect them to become so. As the Covid-19 pandemic has shown, some sectors can be hit particularly hard in certain circumstances, whilst in other circumstances most sectors can witness some degree of turbulence. Nevertheless, sector expertise – and hence sector-focused funds – are on the rise and this can be expected to continue. Our 2021 planning includes both generalist and sector-focused funds, particularly in healthcare and technology, where we find sector expertise has demonstrated clear benefit in value creation from entry to exit. We have always maintained an ‘open door’ policy with regard to first-time funds; after all, every manager has a first fund. First-time investors, however, are much more difficult than, say a spin-out of an existing manager. Whilst it is not easy to invest in a first-time fund, the ability to establish relationships early on can be very important for building deeper knowledge of the manager and for access in later vintages. Although we have committed to first-time funds each year, we currently expect new additions in our portfolio may be somewhat less prevalent in 2021 given the number of strong performing existing relationships and target established managers coming to market.
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