LP interview: Partners Capital

The classic outsourced chief investment office (OCIO) model involves teams spinning out from US endowments and offering endowment-style exposure – an appetite for illiquidity risk, an emphasis on manager selection – to other institutions. Client bases are often highly concentrated, and products can be inflexible. Partners Capital claims to take almost the opposite approach.

“A lot of the US-based OCIOs were used to managing one client, and so they had to think about how they could serve more,” said Adam Watson (pictured, below left), the firm’s co-head of Asia Pacific. “Our model was born of serving many different clients, we’ve always been customer-centric, and we’ve retained that customised approach rather than asking who fits into our existing strategy.”

It is, therefore, difficult to pin Partners Capital to a particular investment style or portfolio construction agenda. The firm has USD 45bn-USD 50bn in assets under management (AUM), of which one-third is in private assets. Private equity and venture capital accounts for two-thirds of that allocation, with most of the remainder invested in private debt.

This is spread across a few hundred clients, but their needs are wide-ranging: from endowments that outsource their entire portfolio to Partners Capital and want multi-asset-class exposure, to family offices that award the firm a mandate for 40% and use other third-party managers for the rest, to high net worth individuals (HNWIs) who want to cherry-pick specific themes or opportunities.

Partners Capital does offer pooled vehicles, recognising the cost, convenience, and diversification benefits they bring to smaller investors interested in private assets. However, these are few and focus on specific geographies or themes like decarbonisation and impact. Many investors prefer the bespoke approach – manager by manager and investment by investment, with dozens of line items.

Customisation is king?

When the firm started out in 2001, it served investment professionals – including senior executives from top private equity shops – who were looking to diversify their holdings but were unimpressed by the cost and variety offered by traditional providers at the time. Today, half the clients are institutional players, with endowments and foundations prominent among them.

“We have a model portfolio we use as a reference, but every portfolio is different,” said Emmanuel Pitsilis (pictured, below right), the other Asia Pacific co-head. “There tends to be a relatively high allocation to alternatives of around 30%, whether it’s liquid strategies like absolute returns or private assets, but that’s in line with most endowments, which might have 30-50% in private assets and 0-25% in absolute returns.”

Customisation is regarded as a key selling point in Asia where clients tend to be less advanced in their outsourcing journey than peers in Europe and the US, and less keen on 100% mandates. This is especially the case with family offices, which have extensive exposure to certain areas and want help with diversification, and patriarchs who are keen to retain an element of control.

“In Asia, when we deal with families, they tend to be successful businesspeople and they think about investment differently. They want to be in the flow, and you can’t stop that,” Pitsilis explained. “We must be pragmatic in how we serve them, so having one product would be very hard. The bespoke approach allows us to build these relationships step-by-step, so they know how we work.”

He adds that, on average, it takes 36 months to onboard a new client in Asia, compared to a few months in the US and Europe. This makes having a presence on the ground, and a foothold in the region’s professional and social networks, incredibly important.

Watson, who has been with Partners Capital for more than 13 years, was responsible for making that initial foray in 2013, working out of Hong Kong and then Singapore. It was a joint effort with Arjun Raghavan, who is now the firm’s CEO. Raghavan recruited Pitsilis, a partner at McKinsey & Company and then a start-up founder and early-stage investor, as his replacement in the region last year.

On entry, Partners Capital had two clients in Asia – not enough to justify establishing an office. The decision was largely driven by a desire to improve coverage from an investment perspective, although getting to know the local PE community led to inbound inquiries from prospective clients. Today, Asian endowments, foundations, family offices, and HNWIs feature on the client roster.

“We had managers investing in Asia from the West and it was more macro-oriented and timing-focused. They weren’t really on the pulse of what was happening with individual companies, and so they were missing developments around the consumer-technology boom in China,” said Watson.

“We also saw more homegrown funds in Asia, people who were smart, had risen within global firms and moved to London and New York, and who were coming back to the region. We thought it was a good time to be on the ground doing manager research.”

They made no new commitments in the first year, preferring to get a sense of the market and figure out what a redefined Asia strategy should look like. Initial moves in 2014 were into private credit and private real estate. Private equity and venture capital soon followed, and Partners Capital now has approximately 10 live relationships in Asia, where it has made its most recent fund commitment.

Science of selection

While there are some pan-regional funds in the portfolio, Partners Capital skews towards the mid-cap space, favouring managers that are independently owned, closely aligned with investors, and able to demonstrate strong post-acquisition capabilities. Venture exposure follows core themes the firm finds interesting, such as life sciences, emerging technologies, and energy transition.

“We’ve made allocations of USD 5m all the way up to USD 500m, but in general, we don’t do global mega-funds,” said Watson. “We are more comfortable building a portfolio of three or four sector specialists than going for a large buyout fund that allocates across sectors.”

Primary fund commitments represent the core of the firm’s business, although a co-investment head was recruited in New York in 2018 with a view to making 20% of the portfolio direct. Secondaries exposure is up to 10%, but it remains opportunistic, dictated by the needs of individual clients – for example, when a portfolio is being built from scratch, they can help offset the j-curve effect.

When mapping out regional exposure, Partners Capital makes its assessments across all asset classes and judges which is the best fit for the opportunity set. China growth and Japan buyout were both deemed attractive themes in the private markets space.

These decisions were based on what was achievable in the public markets at lower cost. In China, technology companies were staying private longer, so value was being realised ahead of IPO. In Japan, the firm found that corporate governance-driven change is hard to enact through the public markets. Meanwhile, on the private side, entry multiples were low and deal financing plentiful.

“We’ve done less in India because there are a lot of listed companies, and once you get out of the top 10, few global investors trading in those names, so there is dispersion and the possibility for alpha, said Watson, noting a historical preference for public markets over private markets in India. "However, that is under review, given the growth opportunities coming up,” said Watson.

India-based GPs recognise these dynamics as well, which explains the historical prevalence of PIPE deals. Watson adds that this kind of crossover is relatively common in Asia. As a result, the Partners Capital team in the region – which now numbers eight, most of them focused on investment – is less siloed by asset class than those elsewhere, with frequent discussion of common issues.

Southeast Asia also meets the private markets access criteria, given the combination of macroeconomic growth and rapid technology adoption has turned venture capital into an area of interest. However, Partners Capital is held back by the fragmented nature of Southeast Asia and the obstacles this creates to scale, questions around the availability of exits, and a lack of reliable GPs.

“Only a small number of GPs have real track records. And while we like working with emerging managers – we’ve done well with that elsewhere – it takes time in Southeast Asia,” said Pitsilis. “We don’t invest in the names you would recognise in that market, but we are talking to a lot of them.”

The China question

The notion of a supply-demand imbalance in terms of quality managers extends into other markets. Partners Capital’s long-term view on China’s growth potential is unchanged, so a natural inclination to exercise caution following the upheaval of the past 18 months, reflected in greater scrutiny at the global investment committee level, is tempered by a resolve to continue supporting portfolio GPs.

Client appetite for China ranges from bullish to risk averse. Pitsilis estimates that, on balance, the firm is maintaining relationships, though allocating slightly less capital in certain cases. “You can’t visit the best manager in China and say, ‘I’m a big player globally, I want USD 200m of your fund.’ You must show you are a strong LP that can back them through tougher times,” he added.

Deployment is complicated by managers delaying fund launches because they want to avoid a drawn-out process. Partners Capital has found that investor relations executives are increasingly trying to extract soft commitments from LPs, with a view to securing a rapid first close and creating momentum around a fundraise. The absence of certainty on timing can be frustrating.

Another consequence of the regulatory volatility at the heart of China’s recent troubles is strategy shift. Partners Capital was already tracking a shift in venture capital from consumer-technology to business-facing concepts, but managers have begun reaching even further into areas like green-tech and hard-tech, while making earlier-stage bets on start-ups.

“GPs are under pressure to redefine their business models, and we’re even seeing them expanding the region in which they operate to Asia ex-China or even the US. They are pushing at the boundaries of what LPAs [limited partnership agreements] allow them to invest in as they try to develop greater specialisation,” said Watson.

“There’s definitely an evolution taking place within some of these firms.”

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• Topics
• Greater China
• Southeast Asia
• North Asia
• South Asia
• LPs
• Fundraising
• Asia
• Partners Capital