LPs
LP in focus: How Pictet stays picky amid a frothy market
February 28, 2020
Across the globe, private equity fundraising activity is on the rise, and investors are bringing in unprecedented amounts. Last year saw European PE funds raise a record €86.4 billion (about $95 billion), according to PitchBook's 2019 Annual European PE Breakdown. Our corresponding report on the US market, meanwhile, revealed that PE fundraising in the country hit an all-time high in 2019—surpassing $300 billion for the first time ever.
"The appetite for private equity as you know has grown dramatically," said Maurizio Arrigo, head of private equity at Pictet Alternative Advisors, the alternatives unit of Swiss private bank Pictet. "The question I'm often asked is: 'Is it a good time to invest in private equity? Valuations are high, there is a lot of money around, is there too much money chasing too few good deals?', which is a very fair question and a crucial question."
The recent surfeit of private equity capital has led some to question whether we have reached an apex. In an interview with London's Citywire, Pictet chief strategist Luca Paolini said the asset class is a "bubble waiting to burst."
The first iteration of its private equity fund-of-funds, Monte Rosa, closed in 2008 on the cusp of the global financial crisis. Its fourth and most recent vehicle of this kind closed on $815 million in 2017, more than 2.5x larger than its predecessor.
"The question of timing is not so important because you need to believe that there are good private equity funds around that know how to pick the right company and transform it at any point in time, regardless of the valuations," said Arrigo.
For this reason, Arrigo places an emphasis on its manager selection. Today, Pictet has around 55 GP relationships across various regions, sectors and strategies. While his firm will swap out managers at times, the number of relationships remains stable, and selecting the right GPs is key, especially during this time of high demand in the industry.
Not all funds are created equal. Arrigo insists that managers need to have a specific angle that they can play to avoid the crowd. One manager backed by Pictet, for example, focuses exclusively on B2B software companies, and with that focus comes sector expertise: "You know the companies even before they're up for sale, you approach them ahead of time and you establish a relationship with managers."
"[GPs] have structured the process of helping companies to buy smaller companies, and the smaller ones you pay less for, so the returns are fantastic," he explained, noting that companies were less experienced with add-ons 10 to 20 years ago, but are now using the strategy often. It has indeed picked up in popularity—add-on investments accounted for 44% of all European PE deals 2019, up from 29.1% a decade ago, according to PitchBook data.
Pursuing an effective buy-and-build strategy often involves forming a partnership with the seller, Arrigo added. In many cases, this will be a large corporation selling off a division. Arrigo said that while selling at a decent valuation is important for the seller, they also need confidence in the buyer's vision and its ability to grow the business, especially when they plan to retain a minority stake.
From an LP perspective, Arrigo noted that managers should not only differentiate themselves at the portfolio level, but also consider co-investment opportunities. Two more obvious benefits of this are fewer fees and greater transparency.
"Co-investments have really become flavor of the day recently as clients prefer to invest directly into a company rather than giving money to a blind pool," Arrigo said. Pictet has made 144 co-investments. Of those, 87 have been exited, generating on aggregate a 2.6x money multiple and a 35% IRR, according to Arrigo.
Looking ahead, Arrigo emphasizes not just the value of being selective about its fund commitments, and ensuring it back to those managers that have the expertise and track record to invest throughout the cycle, but also making sure it has the right balance of strategies needed for a diversified and dynamic portfolio.
He added: "Some vintages are better than others, yet if you're convinced by the model and you invest in the right opportunities over time, it will average out and you will get the superior returns that private equity delivers."
Featured image via twomeows/Moment/Getty Images; image of Maurizio Arrigo courtesy of Pictet
"The appetite for private equity as you know has grown dramatically," said Maurizio Arrigo, head of private equity at Pictet Alternative Advisors, the alternatives unit of Swiss private bank Pictet. "The question I'm often asked is: 'Is it a good time to invest in private equity? Valuations are high, there is a lot of money around, is there too much money chasing too few good deals?', which is a very fair question and a crucial question."
The recent surfeit of private equity capital has led some to question whether we have reached an apex. In an interview with London's Citywire, Pictet chief strategist Luca Paolini said the asset class is a "bubble waiting to burst."
Keeping focus
For his part, Arrigo (pictured right) takes the long-term view, noting that the group—operating since 1805—has seen its fair share of cycles.The first iteration of its private equity fund-of-funds, Monte Rosa, closed in 2008 on the cusp of the global financial crisis. Its fourth and most recent vehicle of this kind closed on $815 million in 2017, more than 2.5x larger than its predecessor."The question of timing is not so important because you need to believe that there are good private equity funds around that know how to pick the right company and transform it at any point in time, regardless of the valuations," said Arrigo.
For this reason, Arrigo places an emphasis on its manager selection. Today, Pictet has around 55 GP relationships across various regions, sectors and strategies. While his firm will swap out managers at times, the number of relationships remains stable, and selecting the right GPs is key, especially during this time of high demand in the industry.
Not all funds are created equal. Arrigo insists that managers need to have a specific angle that they can play to avoid the crowd. One manager backed by Pictet, for example, focuses exclusively on B2B software companies, and with that focus comes sector expertise: "You know the companies even before they're up for sale, you approach them ahead of time and you establish a relationship with managers."
Build it and they will come
One area where sector expertise comes in handy is buy-and-build strategies. Arrigo echoes a broader industry appetite for platforms and the managers that can execute on them."[GPs] have structured the process of helping companies to buy smaller companies, and the smaller ones you pay less for, so the returns are fantastic," he explained, noting that companies were less experienced with add-ons 10 to 20 years ago, but are now using the strategy often. It has indeed picked up in popularity—add-on investments accounted for 44% of all European PE deals 2019, up from 29.1% a decade ago, according to PitchBook data.
Pursuing an effective buy-and-build strategy often involves forming a partnership with the seller, Arrigo added. In many cases, this will be a large corporation selling off a division. Arrigo said that while selling at a decent valuation is important for the seller, they also need confidence in the buyer's vision and its ability to grow the business, especially when they plan to retain a minority stake.
From an LP perspective, Arrigo noted that managers should not only differentiate themselves at the portfolio level, but also consider co-investment opportunities. Two more obvious benefits of this are fewer fees and greater transparency.
"Co-investments have really become flavor of the day recently as clients prefer to invest directly into a company rather than giving money to a blind pool," Arrigo said. Pictet has made 144 co-investments. Of those, 87 have been exited, generating on aggregate a 2.6x money multiple and a 35% IRR, according to Arrigo.
Looking ahead, Arrigo emphasizes not just the value of being selective about its fund commitments, and ensuring it back to those managers that have the expertise and track record to invest throughout the cycle, but also making sure it has the right balance of strategies needed for a diversified and dynamic portfolio.
He added: "Some vintages are better than others, yet if you're convinced by the model and you invest in the right opportunities over time, it will average out and you will get the superior returns that private equity delivers."
Related read: For more on activity in Switzerland, download our 2019 DACH Venture Ecosystem FactBook.
Featured image via twomeows/Moment/Getty Images; image of Maurizio Arrigo courtesy of Pictet
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