Numbers game

Kirk Dizon, co-head of private equity at Hall Capital Partners, talks about the tough decisions facing an advisor with roughly 1500 funds to choose from.

Hall Capital Partners, an advisor to families, endowments and foundations, reduced the amount it committed to private equity in the last two years but has ramped up its focus on emerging markets and distress. The firm’s private equity programme covers strategies including buyout, growth, distressed, credit, and venture capital, and the firm directs approximately $20 billion in investment assets. PEI talks with Kirk Dizon, co-head of Hall’s private equity group, about the challenges and opportunities of being a limited partner in 2011. 

Hall Capital committed $220 million to private equity in 2009 and $160 million in 2010. What number are you anticipating for 2011?

There are a couple of competing forces that I consider when I think about the number.  On one hand, there are going to be a lot of firms in the market this year.  There are the firms who last raised funds in 2005-2006 and have expiring investment periods.  There are also those who have been able to deploy and raise capital through the cycle, and many of them are pretty strong.   On the other hand, client appetite for illiquid investments is still much below pre-Lehman levels, so there is a very high premium needed for investing in a 10-13 year product where you may not see any liquidity for years. Plus a lot of that interest will be directed towards illiquid energy, real estate and commodities opportunities instead of straight private equity. So all in all, I would guess around $200 million for this year.

There are an estimated 1500 funds coming to market in 2011. Is there too much choice or is it a good time to be an LP?

I think it was more fun to be an LP in 2009 and 2010.  There were a lot fewer LP’s that were actively making commitments particularly in 2009, so it felt a bit like putting a fantasy team together in that you could get access to and invest in just about anyone that you wanted.  Now there are many institutions that are back making commitments to funds.  However, without having any empirical data, I don’t think that the increased appetite for investing by the LP community is commensurate with the supply of product that’s going to be in market, so I think fundraising could be challenging for many GP’s this year.  We’re going to have to make tough choices on our re-ups just because so many of them will be out at the same time. Again, many of the folks from 2006-2007 are going to have to come back to market in 2011-2012 if they haven’t raised a newer fund already, and there just isn’t the demand that there was five years ago.

You invested in emerging markets and distressed in 2009 and 2010 more than you had in the past. Do you see your 2011 strategy maintaining that?

In 2009, 80 percent of our commitments or more were made to emerging markets or distress strategies, but that was in big part a function of who was in the market at that time. Last year it was more balanced. This year it’ll be a little bit more balanced. There’ll be a heavier component to buyout. Several of our core buyout managers will be in the market this year and next, and presumably we will want to support them. However, there still will be a significant piece in emerging markets – call it 20 percent to 25 percent.  Maybe we’ll commit around 15% to distress/turnaround, but again it will be a function of who’s at market.

What strategies are you excited about in 2011?

This year will be more broad-based than recent years – we’re definitely looking at a wide range of strategies.  Our 50 to 60 active relationships are global and range all the way from mega buyouts to early stage venture with growth and distressed in between.  In the next three to four months, our highest priority pipeline consists of a US seed stage venture fund, an Indian VC/growth fund, a China VC fund, a Brazil buyout fund, a US buyout fund and a European distressed fund.

Do you think any of your family offices have lost faith in private equity or will you see the same amount of families allocating to the asset class in 2011?

It depends on the specific family and their goals and objectives as well as their tolerance for risk.  For many, the priority is capital preservation and liquidity over growth, and so they would be less likely to invest in a private equity strategy that is inherently super-risky.   Other folks have made their money by taking a lot of risk and getting paid for it, and frankly for some of them – particularly if they’re private equity GPs or successful tech entrepreneurs – they already have too much exposure to the asset class, so we will steer them to more liquid, less risky strategies.  However, we have plenty of families that are interested in growth and have long-term investment horizons and will continue to commit capital to private equity.