Private equity moves to centre-stage

Tomas Hricko, product manager at global private equity fund-of-funds manager, Adveq, tells Amanda White why private equity should be the core of an institutional investor’s portfolio, not a satellite.Private equity has an increasingly definitive role in institutional portfolios, but for product manager at global private equity fund-of-funds manager, Adveq, Tomas Hricko, its place is slightly skewed.

“Private equity definitely has a place but as an illiquid investment it should be a core, not a satellite, because that’s what you can’t touch,” he says.

Both private equity and venture have now posted six consecutive quarters of positive returns, ending September 30 according to Cambridge Associates’ private equity and venture indexes. It’s a good time to be arguing for private equity.

“In private equity you want to dominate, like in an activist fund, it is long-term in nature and should be the core,” Hricko says.

“Do you really think you’re going to be successful in a highly concentrated and traded market like active long only? Investors should be closer to a hedge fund if they want to add value in that. From a construction point of view, private equity performance and risk drivers are idiosyncratic so there’s low correlation in alpha.”

Hricko “definitely believes” in the illiquidity premium and that some strategies in particular require a lot of skill, including his flavour of the month, the distressed or turnaround market.

“The turnaround market is very idiosyncratic, there is a lot of operational management required and it is a fragmented market, there’s a lot of room for skill. There is no other investment where you can benefit from turning companies around.”

He says the unique factor about distressed investing is that it provides access to a specific phase in a company’s lifecycle, the restructuring or revival phase that cannot be addressed through traditional public/private equity or fixed-income programs.

It’s also a phase that is less tied to capital markets than regular buyouts because of its inherently operational driven nature.

Regionally, the manager is looking at turnaround opportunities across the board, in Europe with its fragmented bankruptcy processes, and the US with a large amount of loans coming through to companies.

“In the US, turnaround is attractive because there is still a wall of maturities in small- and mid-sized companies and a large mound of loans coming through.”

Hricko also believes there are opportunities, particularly in the US and China for investment in venture.

In US venture, the IPO pipeline is extremely healthy, with some high profile companies such as Facebook being obvious examples; with the sector being driven by a steady rate of technological innovation and the fallout from endowments selling their investments.

“Last year we closed a $180 million fund-of-funds in venture technology, we are seeing investments in some game-changing technology,” he says.

Similarly in Asia, particular India and China, technology is dominating venture, but in a different way.

“In China they are focused on copying and implementing technology. But we are focusing on firms that service the domestic market, like the Facebook of China,” he says.

Hricko also says sustainability is a focus for China, using as an example the fact that country now has 50 per cent of the global wind capacity through wind turbine producers.