Why has Partners Group increased its focus on direct investments?
Partners Group’s integrated approach to private markets investing includes a combination of direct, secondary and primary investments. Investing in this manner allows us to take maximum advantage of market opportunities at any given point in time during the entire economic cycle. This approach leverages our extensive global network to source, analyse and execute attractive investments for our clients across all asset classes and geographies.
In 2007, we allocated about 40 percent to 50 percent of our global programmes to fund investments while reducing our investments in secondaries. Following that point in the cycle, we saw corrections in the market with secondary opportunities increasing and shifted our focus significantly towards secondaries in the first half of 2009. Now, with the improving economic environment since 2010, we have become more active in direct investing again. In the current market environment, we have identified increasing investment opportunities on the direct side. Direct investments complement our portfolios and offer us better access to certain regions – for instance to the rapidly growing consumer base in emerging markets – as well as to specific sectors. This direct exposure is more difficult to achieve in a fund setup.
Would you make a direct investment in a company if you weren’t given a board seat?
From time to time, we might complete a joint investment without a board seat. This happens in cases when we are convinced that the asset is very attractive and we would like to ensure our clients are able to take advantage of this opportunity. While our clients may receive exposure to the asset through a fund investment this typically results in only a very small allocation.
Also, there might be circumstances where we have provided a smaller amount of the financing and a board seat may not be justified.
The crucial question however, is more about what we can add in terms of value in a company’s operational improvements and development, and that might vary depending on the asset. But I think it would be wrong to say we only invest when we get a board seat. One key aspect of joint investments is that we are cooperating with another manager who is most likely directly involved.
Would you potentially compete for a deal with GPs whose funds you back?
I don’t think that’s the case. Our managers have realised that our strategy is not to compete with them, it’s not what we’re going to do. We are a joint investment partner, so if they don’t have the capital, we can provide it; if they don’t have the industry teams available internally, we have the industry teams; if they’re looking at assets in certain regions with global aspirations, we can offer a very large global platform and introduce them to business partners, to suppliers, and to clients.
Our investment partners are also aware of the fact that we source our own investment opportunities. Often, we think about the best way of developing an asset and actually invite our investment partners in if we believe teaming up would add value or open new perspectives.
What are the opportunities you see in Asia?
It’s very tough to generalise. We have seen a quick market recovery over the last two years with the lending environment opening up, the public market recovering very substantially, and eventually this development had its consequences on valuations in the private market.
With the valuations we see today, I think you have to be very careful. It’s difficult to generalise by regions or by types of assets. Given the impressive expansion of the Asian middle classes, we certainly still like investments in the consumer sector if we can buy them at the right price. Also, we prefer small- to mid-cap transactions as they’re more resilient in terms of their valuations through the economic cycles.
In Australia, we quite like the infrastructure space. This is maybe one area that I would probably generalise as quite attractive – private concession types of businesses or project finance businesses for developments in Australia. In these infrastructure projects, there is a lack of capital especially for subordinated loan or preferred equity layers, which offers attractive opportunities. The reason why we like these projects is because there is this demand/supply imbalance for capital. These businesses are good credit arbitrage businesses, allowing sponsors of the equity and mezzanine owners to transfer all developmental and operational risks. We systematically identify opportunities that show these types of characteristics.
You recently closed a €500m global infrastructure fund; how much will it invest in Asia?
On the private equity side, we invested last year about 25 percent in Asia, whereas in infrastructure it is more opportunistic, generally speaking. If you look at global infrastructure, there is usually a bigger focus of our clients on the developed markets, like Europe, the US, but also Australia. Especially given that many of our clients have a stronger focus on the brownfield area, we don’t prioritise Asia other than Australia, but of course, we look at investments opportunistically.
In the next few years, we expect to see a similar development to what we saw in private real estate and private equity in private infrastructure, with the continued emergence of an ongoing professionalisation as well as dedicated teams of specialists. Going forward, I think we’ll see more demand for specific investments in Asia.
You have offices in China, Korea, Japan and Singapore; have you thought of opening in India?
Yes, we’ve thought about it a few times, and I think it will happen eventually. If you asked me five years ago whether India or China would be more attractive for us, I would probably have told you India. But in practice, we have completed fewer investments in India than in China. The Chinese market enjoys less protection and many more opportunities than we expected five to 10 years ago. India’s market is still somewhat protected and has changed less in the last five years in relative terms. It is also a market that has quite often been relatively pricy, and we have often seen quite a bit of competition between local players, entrepreneurs and large families. We have not been as active as we would originally have thought in India, but this has started to change more recently and we are becoming somewhat more active. Against this background, we expect to potentially open an office in India in the next few years.
A lot of firms have suffered numerous employee spin-outs in Asia. How do you retain talent?
First of all, you need to create a work environment which people enjoy. We have a very strong culture and offer our professionals a variety of career opportunities in a global and dynamic environment. We focus on flat hierarchies and support a high level of responsibility, especially also for younger team members. If employees don’t see development and advancement perspectives they will look for alternatives.
Furthermore, it is important to create incentives that align interest between clients and employees on a long-term basis. A short term incentive system is risky because it encourages short-term problem solving, which I don’t believe ever works in private markets.
Any successful firm needs a strong culture, a challenging work environment and people who are proud to be part of the team and the global brand. You have to let your employees feel that the firm is benefiting from opportunities and is taking the right steps in the right direction. It also has a lot to do with hiring the right people in the first place. That’s probably the best filter to avoid too much fluctuation – hiring entrepreneurial people with a long-term mindset, coupled with the right company culture and long-term incentive systems. I think this remains a constant challenge for any firm.