In its first year the Future Directions Private Equity Fund run by AMP Capital Investors (AMP CI) generated a headline return of 203.8 per cent and an internal rate of return (IRR) of 20 per cent, primarily due to its foray into the secondaries market. Contrary to the experience of many secondaries investors, whose expectations of buying good assets cheaply from distressed sellers were largely unmet, AMP CI’s large commitments to the sector, representing up to 30 per cent of the $170 million it invested in private equity last year, paid off well. “People say secondaries was the opportunity that never was, but secondary assets can produce results,” Suzanne Tavill, portfolio manager of the multi-manager product, said.

Tavill attributed AMP CI’s solid gains to the manager’s exposure to secondary assets of a “palatable” size – between $5 million and $15 million – which were sourced through StepStone, its private equity advisor. Secondary assets are typically more mature than primary investments and therefore more likely to deliver higher returns sooner. Tavill said AMP CI targeted a long-term IRR of 15 per cent from the private equity portfolio. The manager partnered with StepStone in early 2009 to build a global private equity program. In addition to its 30 per cent exposure to secondaries, AMP CI has allocated 5 per cent to co-investments and 65 per cent to primary funds.

The manager aims to commit a further $170 million or so to private equity throughout 2010 and would not follow a similar allocation pattern, but respond to opportunities, Tavill said. Tom Keck, chief investment officer with StepStone, said some of the largest challenges facing private equity managers were carefully deploying the glut of capital raised before the financial crisis – which resembled “a pig in a python” – and negotiating the “wall” of refinancing due in the medium-term future. “Even though the wall is in 2014, people have to pay attention to it today,” Keck said. The debt and equity components underpinning businesses will need to be restructured, resulting in debtfor- equity transactions and asset consolidation as companies sell parts of their business. Lenders will feel some pain, the equity holders will experience more “and that equity capital will require a fair amount of return,” Tavill added.

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