Neil Macdougall, Chairman at Silverfeet Capital, shares his insights on successful LP and GP strategies and the long-term evolution of the private equity sector.
What are the characteristics of a successful LP?
Successful LPs should have an asset allocation policy which is carefully thought through and is applied consistently throughout the investment cycle. They should be leaders based on their experience; this will not feel comfortable because it means being among the first to do something, rather than running with the herd and being followers of the very latest ideas. When they seek information, it should be relevant and useful: it should be acted on, rather than used merely to build up a thick file. Their fund managers’ behaviour and motivations should be more important than dry statistics. Their return expectations should be realistic for the level of risk which they are willing to tolerate. When all of these characteristics are combined, this should produce good and consistent investment returns.
“LPs’ return expectations should be realistic for the level of risk which they are willing to tolerate.”
What about GPs?
They need to be able to generate consistently good returns for their investors which requires a smart, hardworking culture. GPs should also follow the investEurope code of conduct: acting with integrity and fairness, keeping promises and maintaining confidentiality, being transparent about any conflicts of interest which arise and – most importantly of all – doing no harm to the PE industry and, instead, actively enhancing its reputation as a value creator for all stakeholders. This requires flexibility and the ability of the firm’s leadership to evolve both in terms of the individuals who bear this responsibility and also in terms of how they respond to it, by embracing ESG, for example.
How is the private equity industry evolving with regard to net returns?
Private equity follows the laws of economics so attracting more and more money into the PE market will inevitably lead to lower returns. What’s currently unknown is the rate at which this is occurring. The wider adoption of ways in which to add real commercial value is one factor which is offsetting the reduction in the rate of returns. These also include buying and building or focusing on smaller add-on acquisitions to build up bigger and better companies. Better operational management techniques, adoption of better IT and reporting systems and smarter people management are other factors which will ensure that returns can be maintained. PE also specifically targets growing sectors of the economy which should support investment returns in the long term.