Private equity is expected to be the highest-returning asset class in our portfolios and offers access to some of the most talented long-term investors and operators of private (non-public) companies. In contrast to the zero-sum game of public markets, we believe private equity allows investors to benefit from the private equity owner’s ability to add value through strategic, operational and financial levers. Their corporate governance advantage, in combination with typically higher leverage than public companies and the ability to call capital when opportunities arise, results in an asset class illiquidity premium on top of what public equities are expected to earn over the long-term. We define the private equity asset class broadly to include leveraged buyouts (across all sizes of companies), growth equity and venture capital.
We are specialists in middle market buyouts, with a bias toward smaller companies who have yet to embed institutional business processes and often have significant scope for enhancing the quality of management. We believe that the future of private equity is no longer about leverage and multiple expansion but will be crucially dependent upon Post-Acquisition Operating Value Added, or what we refer to as “PAOVA”. Younger and smaller firms, found in the middle market, have proven to offer the greatest scope for earnings growth and re-ratings from cash flow stabilization.
With the mega- and large-cap buyout firms focusing on enterprises with $1 billion and higher enterprise values, they often acquire highly institutionalized organizations with strong management teams and ambitious strategies where a new owner will struggle to bring significant value added.
Our private equity manager due diligence is looking for extraordinary in-house operating performance improvement capabilities, with the most efficient and effective delivery processes to portfolio company management teams. We evaluate each firm’s own PAOVA capabilities against our PAOVA best practice playbook.
PAOVA is the single in-house core competence we hold and seek to develop most rigorously to continually enhance our private equity investing capability. In many cases, we find ourselves in a two-way learning transfer on PAOVA best practices with our private markets managers.
Venture Capital and Growth Equity
We have actively invested in venture capital since the beginning of our private equity program in 2004. In aggregate, we have committed approximately $2 billion to venture capital managers and $1.5 billion to technology-focused growth equity and buyout managers.
In venture capital and growth equity, we have long deployed a “barbell” approach where, in the first instance, we allocate to many of the most long-established blue-chip VCs, across all stages from early to late-stage to growth equity.
At the other end of the spectrum, we dig deep into our VC network to find newer emerging venture capital firms focused on early stage investing, often started by small teams spun out from a combination of the larger blue-chip VCs and highly successful tech companies.
Most of our VC and growth equity partners are concentrated in Silicon Valley, but our current line-up spans the globe including East Coast US, European and Asian VCs.