Weathering cycles requires focus on fundamentals – AVCJ Forum

While investors believe they will continue to find upside in a pending economic downturn, closer attention to risk hedging strategies is required. Nikos Stathopoulos, a partner at BC Partners (owner of Acuris, AVCJ's parent company), described the best approach to weathering storms as a matter of discipline and operations, rather than simply timing.

“You cannot sit on the money just claiming everything is very expensive so let’s wait another year,” he said. “The way to manage the cycle is by pacing your investments. If you just wait, that by definition implies that you know how to time the market and you know where the market is going to turn, and I think that’s a mistake.”

As a case in point, Stathopoulos highlighted his firm’s investment in UK real estate agency Foxtons during a bull market leading up to the global financial crisis of 2008. Foxtons’ earnings collapsed as a result of the crisis, but BC decided to double down on the company, buying up debt and converting it to equity. It eventually exited at a 3x multiple.

Other industry participants noted, however, that investing with this level of conviction is more difficult in Asia since portfolio companies are generally smaller and don’t have as much internal bench strength in management. At the same time, most PE activity in the region is growth capital, meaning that high valuations are usually more of a pressing issue than leverage.

As a result, dealing with cyclicality in Asia is said to be more a question of GP quality, the understanding that they bring to investments, and the ability to support portfolio companies that have weaknesses in their teams. David Pierce, head of Asia for HQ Capital, explained that addressing these issues requires GPs to maintain sufficiently robust in-house resources.

“One of the issues here is that when it’s relatively easy to raise money, we’ve seen GPs raise a lot more than they had in their previous funds, but they haven’t really grown their teams significantly,” Pierce said. “There are a lot of reasons for that, but I think that makes them a lot more vulnerable when times get tough. It also makes it difficult for them to add value even when times are good.”

Growing consciousness that the industry is operating in the later stages of a macro cycle is also seen as a partial driver of a number of strategic trends, such as a greater focus on co-investments among LPs and moves by GPs to diversify into other asset classes. The likelihood of success in these transitions was framed as depending on continued GP-LP alignment.

Bryan Lewis, CIO at Pennsylvania State Employees' Retirement System, noted that when GPs pursue multi-strategy approaches, it helps cement relationships with LPs that are increasingly looking to have fewer, more diversified partnerships. However, pivots of this kind must not disrupt the culture that allowed the GP to become successful in the first place.

“We’re questioning more now whether this a strategic move or a tactical move to try to put money to work that you wouldn’t normally put to work, or invest in strategies at the time in the market that you feel is important versus what we signed up for,” Lewis said. “I think the better firms and relationships have been strengthened through this process of real engagement between LPs and GPs.”

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• Topics
• GPs
• LPs
• Asia
• Europe
• Pennsylvania State Employees’ Retirement System (PennSERS)
• HQ Capital
• BC Partners