Maitland/AMO Hosts Inaugural Private Equity Evening at Ivy Club
On October 30th, Maitland/AMO welcomed clients, friends and industry leaders at its inaugural private equity evening. Held at London's iconic Ivy Club, guests were invited to a discussion and friendly debate titled: "Governance Arbitrage: Is activism the new private equity?"
Conor Kehoe, founder of McKinsey’s private equity practice, gave the keynote speech before opening the floor to a discussion and Q&A, chaired by Maitland/AMO CEO, Neil Bennett. Conor’s main thesis was that private equity has been historically misunderstood, primarily in that returns in relation to public market performance have been underestimated. Recent work by McKinsey has demonstrated that the private equity industry decisively outperforms public equities with respect to risk-adjusted returns. Indicative of this is research showing that private equity backed businesses outperformed their relative quoted peers by 60%.
Conor asserted that private equity has grown from the equivalent of 1.5% of global stock-market capitalisation in 2000 to around 3.9% in 2012, or as much as $3tn out of $75tn of global markets. Meanwhile, activist investing remains a much smaller proportion which is only 1/30 the size of the private equity industry. Nevertheless, the number of activist investments has almost doubled globally over the past five years, with notable successes including the separation of PayPal from Ebay to changes in Apple’s shareholder policies. The financial results have certainly been enviable in many cases, with activist hedge funds outperforming other strategies and activist funds’ assets under management swelling to a record $111bn at the end of the second quarter – nearly quintupling since 2008.
Further McKinsey analysis has found that the ability of top private equity funds to deliver consistently high returns is weakening. Until 2000, private equity funds delivering top-quartile returns were highly likely to do so again in subsequent funds. However, this correlation has fallen considerably since 2000. An audience member asserted that “private equity is the best at creating value for institutions,” whilst another noted that “if private equity moves into bigger deals it begins to perform worse”.
In addition, the focus of value creation in the industry has shifted from financial engineering towards improvements in the operating performance of portfolio companies, with correlations existing between high engagement in portfolio companies post-deal and alpha. Activists have been helped by a fertile environment for their strategies and as the financial crisis recedes, corporates have built up balance sheets bloated with cash to be returned to shareholders.
Conor’s observation around the skillsets of General Partners and Board-Members drew particular interest from the audience. He drew on the example that general partners from a finance background, do better when acquisitions are central to the value creation story, whilst partners from managerial backgrounds do better with companies whose chosen route to value is organic growth.
In addition, Conor noted the difference in the effectiveness and focus of private equity versus public company boards, primarily that PE boards, which Conor describes as “the top 10% of the candidate pool”, were felt to be more involved strategy shaping and decision-making whilst less than 30% of public company board members surveyed by McKinsey felt that they took an active role, spending more of their time on risk management, governance and succession planning. As such, Conor said “we need public institutions to think more long term and for boards to be more engaged”.
However, audience members argued that private equity’s role retains its importance, one suggesting that “PE has been a godsend for the last few years as it has made public companies think of the assets they own when no-one else was willing to buy them,” and another that “private equity is not necessarily a better governance model, but it is an asset class perfect for companies undergoing a period of transition”. Another guest argued that activists lack the agency, especially in the more reserved (compared to the US) European and UK markets, where “an EGM is the only tool available the push companies for governance arbitrage”.
Guests spent the remainder of the evening in heated discussion over drinks and canapés. We were delighted to have so many of you to join us for a special evening and would like to thank you for your active participation and insightful questions which created a fruitful discussion and left a lot of food for thought.
We look forward to welcoming you to our 2015 event.
Article written by Seda Ambartsumian and Antonia Powell