UK/EUROPE – Alistair Ross Goobey, the chief executive of Hermes Pensions Management has warned the private equity industry that it needs to cultivate a little more “humility” in its claims of outperformance, arguing that managers have confused a prolonged bull market with genius.
Speaking at the Superinvestor 2001 conference in Paris, Ross Goobey warned that it was becoming increasingly difficult for institutional investors to pick out the wheat from the chaff in the venture world – noting that transparency was at best selective in how it was produced.
He commented: “The most difficult thing for a selector of private equity managers to do is to try to determine those managers who have actually added value beyond these elements.
“As an illustration of the problem, I would quote those private equity managers who boldly exclude performance from some date in the 1980s, and only quote the date where ‘we changed our processes’.”
Ross Goobey added that one consequence of the recent market collapse has been a revelation of the “truth” about the value added by private equity managers
“Many private equity managers do not really add very much. If that is true, how can they justify their high fees? Will there be a sorting of the sheep from the goats?”
He pointed to a survey of private equity returns, which suggested that venture returns over the last ten years to the end of 2000 had averaged 20.4%, beating equities, which returned between 14.2% for non-British and 15.3% for quoted UK stocks.
Analysing the figures, however, he noted that of the 91 funds surveyed, the median return was 12.9% - lower than for equities, even on an IRR versus time-weighted basis.
“Only when you reach the top quartile of funds, or only 23 out of the 91 total, does the average return reach into the over 20% level. 45 funds would have given you returns below 12.9%.”
Ross Goobey suggested that for European investors to take more interest in private equity there needed to be more progress made in the areas of reporting, liquidity and ‘modesty’.
However, Ross Goobey pointed out that his criticism of the venture industry did not decry his belief in the value of the asset class as a diversifier and a source of non-corellated returns.
"We have been delighted with our own forays into this area," he said.