LPs suffer by chasing growth – AVCJ Forum

Tim Sims, managing director at Pacific Equity Partners, noted that LPs find themselves caught in a bind between "wanting a spreadsheet to provide an answer and the real discipline of private equity, which is choosing a great manager in a competitive circumstance." This reliance on data sets was imported from the world of public equities but it is only effective as part of a deeper dive into GP strategy.

"If you find yourself looking at GDP growth data or long-term exchange rates, trying to find where PE will be successful you are looking at the wrong data sets," Sims said. "You need to get down into the detail of what the manager is doing."

Jim Hildebrandt, managing director at Bain Capital, added that investors spend a lot of time thinking about cycles and where growth will be next while success in private equity rests on the ability to navigate multiple cycles. In this context, a strong manager is one with a differentiated strategy, not a fixation with the zeitgeist.

"You aren't trying to find the unique growth industry," Hildebrandt said. "The more interesting, exciting and exotic sector the more money is thrown at it. Where there is high growth there are high prices."

Evolving markets follow a familiar pattern. Early investments are driven by local knowledge and connections, and once the environment becomes more competitive, investors look for points of differentiation. Growth is a seductive force but it is ultimately self-defeating. Citing Korean healthcare as an example, Sims said: "It's growing very fast, but everyone sees that, everyone hears that, and everyone buys that. People end up paying too much for the growth."

As a market matures, capital moves more efficiently and the differentiating factor among GPs becomes the ability to enhance profits in a sustainable fashion. Competition for deals may still be intense and this makes the value creation side of private equity investing increasingly important.

"It's not unusual that nowadays in PE there is no such thing as an inexpensive investment," said Charles Huh, senior managing director at CVC Capital Partners. "In most markets there is an oversupply of capital."

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