Risk Capital Partners’ Luke Johnson believes private equity remains a "seller’s market" with a "huge weight of money to be invested".
Speaking to an audience of nearly 500 at the Guernsey Funds Forum in London on 12 May, the entrepreneur said: "The current climate, unlike quite a few asset classes, which I think are struggling perhaps, is still probably more of a seller’s than a buyer’s market for the right type of asset that would appeal to private equity buyers. There is a huge weight of money to be invested."
Guernsey’s private equity industry had played a part in raising or administering a large proportion of these funds, he said, while the fundraising climate generally seemed as good as it had ever been.
"There’s obviously been a big comeback of banks and bonds and so forth, willing to lend to private equity deals, which is good for the industry, as long as people don’t get overexcited," said Mr Johnson.
"There is this growing appetite among many different institutional investor types to become limited partners and to invest in this asset class, from more and more pension funds to sovereign wealth funds and so forth. The expansion of the alternative asset class is great news. It’s good news for Britain, because we are a world player and it’s obviously good news for Guernsey."
Adding value
Mr Johnson urged private equity managers and their firms to continue concentrating on adding value. "We’ve got to focus on adding value, making a difference, not quick flips, and not exclusively financial engineering. I think that game’s actually over and that leads to trouble politically and otherwise.
"Private equity leaves itself open to criticism if that’s really how they make their money. If you look at the returns and compare it against other asset classes, I would argue that the outperformance derives from added value, not from leverage and it’s important that private equity managers and firms see that."
Investment warning
He also warned against private equity investing in what he described as incendiary sectors, political or otherwise, such as care homes. "I think they make themselves open to criticism if they invest in sensitive areas and then treat it as a purely commercial transaction, without regard to the stakeholders as a whole," said Mr Johnson.
"Private equity, to a degree – considering how much money it manages and the amount of industry and jobs that are connected with private equity-owned businesses – has been relatively fortunate to date that it has not suffered even a tiny fraction of the sort of criticism that the banks have laboured under for the last eight years or so.
"I’d like to think that’s because we are investing, we are helping to create jobs and we are innovating. But I think the industry should be under no illusion, things can turn. It needs to be thoughtful."