Asset owners embrace operating-partner model in PE
Companies in technology, healthcare and other growth sectors are moving off public markets, offering access to private equity investors, BlackRock private equity partners director Julia Wittlin said.
Median growth for private equity has been about 9 per cent recently and valuations have been high. And while the data is similar in public equity, private markets are providing illiquidity premiums through co-investment, Wittlin said.
“Public companies available for purchase are more and more dinosaur companies,” she argued. “More action is happening in private markets. The technology focus is on the private side rather than the public side.”
The New York-based Wittlin made her comments during a recent visit to Australia to speak at the Investment Magazine Fiduciary Investors Symposium in Healesville, Victoria, November 13-15, 2017.
Her presentation focused on how asset owners should navigate private equity valuations and co-investments. BlackRock is one of the world’s largest investment managers, with $US6 trillion ($7.83 trillion) in assets under management.
Wittlin’s team works with large institutions and sovereign funds to build private equity portfolios in health and consumer technology sectors that are not found in public markets. She said BlackRock focuses on “sweat equity”, and works with co-investors to extract value through organisational, regulatory or structural change, giving owners better transparency along the way.
BlackRock has made investments along themes such as healthcare, technology and consumer trends, through a mix of venture capital and other co-investment structures, with an outlook of five to seven years.
An increasing number of global asset owners are seeking out a strategic partner that can help them bring scale and drive alpha, Wittlin said. Along with adding capital, strategic partners – particularly those based in another region – can also bring knowledge and expertise to help drive alpha.
“If I think about the evolution of private equity, it used to be, years ago in the heyday, you could take a company private, lever it up, wait a couple of years, maybe dividend recap it along the way, and exit it at a pretty nice return…Those days are long over,” she said. “I haven’t talked to a group in the last two years that doesn’t have an operating-partner model.”
These partners drive value in margin expansion or revenue growth, to generate the illiquidity or private equity premium.
“More and more, we’re seeing topline assumptions of 10 per cent but US GDP growth forecast at 3 per cent to 4 per cent,” Wittlin said. “You have to believe your company is going to grow three times stronger than US markets.
“With the Illiquidity premium, you have to believe more in the operational value, the multiple drivers of value creation, than the topline number.”
Looking to the wider private equity market, Wittlin said deal volume was increasing as investors sought better returns than those available in equity markets, which are expected to provide tepid results going forward.
“To me, what’s concerning is what types of deals are getting done, the valuation levels of those deals, and the leverage component to them,” she said. “Dry powder is high but deal volume is also high and the question is how does that all come together five years down the road when you’re looking at the returns of the asset class.”
Investors looking for medium-term growth were better off in liquid assets with no fee pressure, she said.
The number of companies moving to private ownership is steadily increasing and, looking ahead, that is expected to continue, partly because of high compliance costs for public companies.
Wittlin said this was true for emerging industries such as cyber-security, in addition to players in technology and healthcare.