Meet the private equity firm pulling back the curtain (and delivering returns for its investors)

By Hans Lee – LiveWire Markets – original article

GCM Grosvenor CIO and Pengana Private Equity Trust Fund Manager Fred Pollock pulls back the curtain on the private equity landscape.

---

It may sound counter-intuitive but veteran private equity investor and CIO at GCM Grosvenor, Fred Pollock, really has no interest in being competitive. He and his team prefer the “partnership” approach rather than the “rival” approach, choosing to stand out by simply being the partner of choice for the entities that are best in class.

And while that might involve hundreds of fellow private equity firms and thousands of deals at any one time, it is this relationships-centric approach that sets Pollock and his team apart from other funds.

Private equity is, at the best of times, illiquid and opaque (at the worst of times, it is also extremely murky). But there is one listed fund that was the first to make liquidity and transparency the core tenets of its business. The Pengana Private Equity Trust (ASX: PE1) has more than 375 constituents, including some 550 separate businesses. But as Pollock explains, part of the job of running this fund is giving clients the added value of being able to view everything his team is doing.

“I view part of our job as making sure clients can see everything happening in the private equity universe … We are able to put the investment resources behind understanding each and every one of those deals in a way that would be difficult for the average investor,” he says.

It’s a strategy that must work. The fund has returned 11.5% per annum on average since its inception. In this extended interview, Pollock joins me from Chicago to discuss the lay of the private equity land and how PE1 plans to stay ahead, even if the global economy goes into a downturn.

——–

EDITED TRANSCRIPT

The role of private equity in today’s portfolio

Although it’s a staple for most institutional investors (up to 20% in some cases), private equity remains near-zero in most retail investor portfolios. But that doesn’t mean it shouldn’t play a role in the portfolio of 2023.

“It should be a big part of your portfolio,” Pollock says. “It’s not really even a question of optimising at the margins. For most people, it’s just starting to be included in portfolios and they need more.”

To open up this traditionally illiquid asset class, Pengana listed its private equity trust in 2019. The first (and only) of its kind investment opportunity allowed long-term investors to access a huge portfolio of high quality global PE investments. Being the first of its kind, Pollock notes there have been challenges in convincing retail investors along the way.

“Private equity isn’t the kind of thing you can build a program up and enter and exit every year. You really need a 10-20 year program, you need to build it up in a diversified manner, and you need to be investing every year to average the time periods where some will be good for deploying capital and some will be bad,” he notes.

But he does say the fund allows the best of both worlds – managing underlying capital from a private equity perspective while keeping the flexibility of on-market position changing. It’s this mix, Pollock says, that is most crucial to the investors he speaks to.

What makes this fund different

In a year when global deal volumes, count, and value all fell by double digits, the trust actually increased its NAV per unit returns by nearly 10%. So how did it do it? Pollock says the answer to beating the competition… is not positioning itself as a competitor.

“In a funny way, I think the reason we’re good at what we do is because we’re not competitive,” Pollock says. “I like to think of Grosvenor as the partner of choice for all of the world’s best-in-class private equity managers. I actually think we’re more of a solutions provider for investors.”

The other thing that makes this fund different is the sheer number of holdings – 550, as of writing. Why so many?

“There are probably five to six thousand institutional-quality private equity firms. That’s a very large number. We’re with 10% of those and what that comes down to is diversifying across different styles, sectors, and sizes,” Pollock says.

The number of holdings also speaks to an industry-wide trend of specialisation, which Pollock says could be akin to a big tech or blue chips stock specialist.

The privatisation trend

Going public costs money and these days, it costs more than ever. For a company trying to list on the ASX with a $1 billion market capitalisation, the initial listing fee is now over $500,000. That’s causing more companies to pause for thought and stay private, a trend that Pollock expects to continue for a long time to come.

“Going public used to be a form of exit for firms,” Pollock says.

“If you were a $1 billion or $2 billion firm that grew to be a $25 billion firm, that can go public and it will go public. That’s probably a level of efficiency where you would want to be in the public markets. But a $2-3 billion firm would be far more likely to sell itself to another private equity firm,” he adds.

The biggest questions investors ask

The biggest single question that prospective investors of private equity funds always have is the transparency question – can I see what’s inside the fund? In many instances, the answer is no. So how does Pollock answer those investors’ concerns?

“This is why we see ourselves as a value-added intermediary,” Pollock says. “Part of our job is to make sure our clients can see everything that is going on in the private equity universe.”

In the case of the Pengana Private Equity Trust, the team knew it would likely be one of few (if not the only) exposure a retail investor might have to the global private equity sphere. They also know the fund’s investors would never complete all the research required on the 500+ entities within it. The scale, Pollock argues, is the fund’s biggest advantage.

The other big question is the same for all investors no matter if you’re in the public or private market – how do you find the great companies? Pollock takes inspiration from Warren Buffett.

• Capital-light over capital-heavy businesses
• Generating strong return-on-equity (15%+)
• Companies with pricing power and a strong cost structure
• A fantastic management team (although you can’t fix a bad business with a good management team)
• A large total addressable market (revenues that are growing 5-10% a year is a good sign)

At fair value, these businesses will often trade at only 12-14x EBITDA even if it should trade much higher than that. As they say, it’s all about finding the great business trading at a good price rather than an awful business that’s in a value trap.

Australia’s only diversified global private equity stock

The Pengana Private Equity Trust (ASX: PE1) is a diversified portfolio of global private equity investments, managed by one of the largest and longest continually operating allocators to alternative investments in the world, Grosvenor Capital Management L.P.