Fear of risk is changing private equity for the worse, MVision chief executive Mounir Guen tells Billy Bambrough
"Why would a brilliant young person go into private equity anymore?” asks private equity veteran and boss of industry advisory firm MVision, Mounir Guen, known almost exclusively by the nickname Moose.
“Why not become a tech entrepreneur and make an app? There’s a lot of new money there.”
Moose, a private equity stalwart, founded MVision in 2001 after 13 years at Merrill Lynch. But private equity has changed since Moose started out more than 30 years ago.
“Wherever they turn, private equity firms have had their ability to make a profit squeezed,” Moose sighs. “It’s a far harder place to make money than it once was.”
This change has been driven by a combination of data use, regulation, and a vastly reduced appetite for risk. “The whole process has changed,” says Moose.
“It used to be a very human business. It was about individuals with the X-factor. Now it’s about institutions that can deliver a differential. It’s rare to see the individual with X-factor any more.”
In recent years less volatility and an increased desire to preserve capital is driving a shift towards the world’s largest firms. Fewer firms are sharing a growing pot.
The number of firms that successfully raised capital fell by 20 per cent from 241 in 2013 to 194 in 2015, according to Bloomberg data. While the total amount of capital committed to funds rose 18 per cent to $249bn (£192bn) last year, from $211bn in 2013.
The bigger funds are raising more than ever, repeatedly breaking funding records, with many over-subscribed. Last year private equity giant Advent International reportedly received interest for $18bn against its $12bn target. Cinven has just closed its sixth pool, above target at €7bn (£6bn).
One reason for a shift to bigger, lower risk funds is ultra-low interest rates.
“A desire to avoid risk is the theme,” says Moose.
Investors are writing bigger cheques to the managers they trust to give them a return, while smaller firms are being ignored.
“It used to be you’d get three chances, three mistakes. Now you get one,” Moose warns. “If you make a mistake, I’m not going to be investing in your next fund.”
There has also been a shift in the origins of private equity funds. Towards the end of the 20th century the US accounted for almost 90 per cent of capital raised globally. Now it’s around 50 per cent, with Europe increasingly pulling its weight and growing excitement about emerging and frontier markets. Moose expects this trend to continue.
“In frontier markets you still find the X-factor individuals. Everything is the same in terms of regulation and reporting, but the motivation and the genius is still there.”
Last month the first $1bn-plus Africa-focused private equity fund was raised by Helios Investment Partners, a London-based group founded almost a decade ago by a pair of Nigerian-born dealmakers.
Africa still has yet to capture the full attention of the world’s biggest private equity firms, but interest has returned after the financial crisis, pushed on by economic growth.
Buyout groups raised $3.3bn for Africa funds in 2013, the latest year with full data, compared with a peak of $4.7bn in 2007, according to estimates by consultancy EY. US buyout group Carlyle last year launched a fund of nearly $700m to invest in Africa.
As private equity becomes more global, emerging markets are where it’s possible to glimpse how the sector used to look. In developed markets it’s not unusual for a private equity-backed company to have three or four different owners in as little as 12 years, in emerging markets firms are less eager to lock-in returns before raising again.
“If an EM private equity firm has a great company, why should it be looking to sell out early?” asks Moose.
The ability to hold on to risk in developing markets means that perhaps some X-factor individuals will still be able to find their place in the private equity industry.