Why family office PCH avoids private equity funds

Private equity dealmaking, exits and fundraising count have fallen heavily since 2021 (see chart below), but one well established Singapore family office was largely steering clear of the asset class a lot earlier than that.

Why? If you can’t access the top private equity or venture capital (VC) funds, you are probably better off in listed stocks, argues Roxanne Davies, head of Proprietary Capital Holdings, the Asian investment office for Italy’s Spinola clan.

Roxanne Davies
PCH

“I've kept away from private equity and venture capital since 2019,” she told AsianInvestor in July. “And I’d also been allocating less before that."

The only exception being that PCH has seeded general partners (GPs), which are the entities that manage funds.

There are various reasons for Davies' wariness of the asset class.

"For one thing, we did not like the terms for LPs [limited partners, or fund investors]," she said. "Generally we observed a lot of red flags developing in both PE and VC, such as additional charges often solely to enrich the GP, nonsensical valuations, and constant fundraising rather than a focus on the portfolios."

"Also, DPIs [distributions to paid-in capital] have not been compelling for the last decade for Asian and global median [PE] funds, especially compared to liquid markets," she added. DPI refers to the cumulative value of distributions paid to the investors in a PE fund relative to the money invested.

TOUGH TIMES FOR PRIVATE EQUITY INVESTORS

Davies is well placed to comment on where an LP will be in the pecking order.

During her 35 years in finance, she has sat on various investment committees and held roles such as head of private equity at HSBC Private Bank.

“You have to know where you’re sitting on the [GP’s] call list,” she said.

“If you can't get into the 1% of funds you'd rather be in – because you’re not putting in $25 million or $50 million or more every single year into the GP’s funds – you might not get allocations to the ‘A’ group [of funds]. You might see the B and C groups instead."

By the A group, Davies said she was referring not just to top-quartile funds, but the best-performing 5% of strategies overall.

“I know for a fact that being in the B and C groups in private equity is a waste of your time,” she added.

“That’s rarely going to give you a better risk-return [than listed equities] over a time frame of 10 or 15 years. 

“Plus, you have zero control and zero liquidity [in private equity funds]. So the trade off [between public and private equity] does not make sense.”

FEWER EXITS, LOWER PAYOUTS

Certainly, payouts to investors have been especially meagre in recent years, with the volume of buyout-backed exits falling to $345 billion last year – the lowest level in a decade, according to Bain & Company's Global Private Equity Report 2024. 

The particularly sharp fall in deal exits in the past couple of years has seen LPs “starved for distributions pull back new allocations from all but the largest, most reliable funds”, said the report.

"Now performance is everything, and the competition for a limited pool of capital has never been more fierce," it added.

Having the right connections is, therefore, all the more important now, and the bigger players tend to hold an advantage.

“When you’re sitting in a bank allocating constantly to the alternative investment world,” said Davies, “you develop a deeper relationship with these fund managers and who may spin out of them.”  

It’s a similar story for the larger institutional investors, such as public pension schemes or sovereign wealth funds, she said.

“They have poured money in because the volatility seems to be low and private equity GPs can deploy larger cheques,” added Davies, who is also very selective about alternative credit, another booming part of the private markets.

HOW TO IMPROVE ACCESS?

So how can smaller investors improve their chances of accessing their preferred PE funds?

“You have to already know who you want [to access], and you have to develop relationships,” Davies said. 

Something else to bear in mind is that many of the ‘A’ group managers aren’t necessarily well known names.

“One may be a very niche, middle-market firm in Chicago,” she said.

“They may well be taking 50% or 60% of the capacity themselves, because their universe is not big enough to take in a big pension. But they may have 10 client families in Chicago and maybe a couple of other people.”

Davies also pointed to the growing use of tokenisation in the private equity industry as another access channel.

This refers to the process of converting ownership rights to a real-world asset into a digital token.

“It’s expensive to manage big PE and VC funds and market them to family offices,” she added. “So GPs are creating tokens or putting feeders into private banks or other distribution entities.” 

“I would personally tread with caution there, but it does allow for smaller allocations.”