Are LPs preferring certain strategies today? And what drives LP allocations? From COVID-induced challenges to interest in the latest developments in Spacs, we take a deep dive with Guardian Life’s Maurice Gordon and see things from an LP’s perspective.
Q: Venture, growth, and buyout – what are LPs preferring now?
Growth and venture strategies are gaining in popularity. COVID-19 has shown institutional investors the importance of having a diversified portfolio. Our experience has been that the venture portfolio significantly outperformed buyouts, and when you have a black swan event such as COVID-19, diversification can increase performance significantly as you lean towards specific parts of your portfolio that are performing better. We continue to build a portfolio of top managers with a 20% venture allocation and an 80% allocation in a mixture of buyout and growth.
Q: How important are secondaries and co-investments today?
Very important. Private equity is continually evolving, and it’s very important to understand new investment market products that could enhance portfolio returns. For our portfolio, we feel it is important to have all three legs of the investment stool: primary investments, secondary investments and co-investments. All three of these activities can enhance returns. Within these strategies, it is important to have a disciplined and well thought out objectives based on the needs of your portfolio.
Q: What does asset allocation at a strategic level look like to you?
Prudent asset allocation is king. One of the most important things that the head of a private equity portfolio can do is have a well thought out asset allocation strategy. After evaluating all of the research, which is limited, much of the final decision is still somewhat of an art based on the targeted objectives of the core portfolio. Fortunately, the allocation that we selected actually outperformed in the recent market situation.
Q: What’s your interest in Special purpose acquisition companies (Spacs)? Do you have any concerns there?
Spac vehicles can be seen as both friend and foe. It is great to have this kind of an exit opportunity for existing portfolio company investments. However, at some point, Spacs will be competitively bidding against other buyout sponsors. Overall, I view the structure as a positive development as the industry involves. My concerns have to do with any potential misalignment of interests brought about by whether the Spac vehicles are inside or outside of the existing fund structure. Industry leading organizations such as ILPA are currently developing industry best practice recommendations. Limited partners need to pay special attention to this unique development.
Q: How have you managed working with GPs over digital communication tools? And to what extent is technology influencing the way LPs do due diligence?
No technology will ever fully replace the benefits of personal interaction. However, the development of remote diligence and portfolio management has been an overall positive for my team. As an example, during the pandemic, I was able to attend an annual meeting in New York, San Francisco and Beijing all in the same day. Also, in another instance, my entire team of 5 was able to attend an important annual meeting on the opposite coast at no cost to Guardian. I have been told by many sponsors that many of these productivity enhancing initiatives would remain in place going forward.
Q: How do you manage people remotely, now that it is commonplace due to the pandemic?
Great teams adapt. This year has been a record investment year for Guardian in private equity. Returns and distributions exceeded pre-COVID expectations. My team has been able to effectively work together to achieve our targeted goals. For us, some of the keys to success have been going completely paperless, having daily short calls with an intense focus, coordinating team calendars and a commitment to achieve the “one most important thing” for the week. It seems like we are continuously learning new methods for enhancing productivity.
Q: From a LP perspective, what do you think will be the key things GPs should watch out for in 2021?
Understanding the impact of the pandemic is now on almost all sponsors’ decision matrix. Everyone also seems to be more aware of black swan events and thinking about various downside scenarios. I believe staying disciplined on the valuation side will benefit all for the participants in private equity.
Q: What do you think will be the key challenges for LPs in 2021?
Challenges will always continue to be around every corner in private equity. What can help conquer these challenges? One idea is to utilizing technology to enhance returns. We have been looking at cloud-based software and technologies to generate cash flow projections and we are also utilizing big data in the portfolio management and deal selection.
Under the spotlight: Maurice Gordon
Maurice joined Guardian’s investment team in 2010 and is responsible for fund investing, co-investing and secondaries. He has over 24 years’ experience in private equity investing and portfolio management. Maurice has successfully originated and led 27 direct and co-investment transactions and has managed institutional private equity portfolios totaling over $4.5 billion in a variety of buyout, venture capital, mezzanine and special situation partnerships, hedge funds, and private placements.