Asset manager Schroders sees private equity opportunities ahead

Schroders’ Claire Smith says coronavirus fallout could drive a wave of buying opportunities in segments of the private equity market.

Claire Smith, the alternatives director at Schroders, sees more buying opportunities ahead in the private equity market. Picture: John Feder..

The fallout from COVID-19 will spark a wave of buying opportunities in segments of the private equity market, particularly as the need for liquidity intensifies, according to Schroders alternatives director Claire Smith.

The market ructions sparked by the coronavirus crisis will also expose managers that in recent years were more focused on growing their assets under management than making the best investments at the right prices, she predicted.

The secondary market, where investors buy and sell pre-existing private equity holdings, is already delivering some good buying opportunities, despite subdued activity, Ms Smith told The Australian, but further price drops expected in the coming months will see it become even more attractive.

“Last year, we didn’t invest much in secondaries because we thought the prices were too high versus the potential return you would make. And now we’re starting to see prices come down quite significantly, so we expect that part of the market will open up again,” she said.

“If investors need liquidity for other parts of the market or to rebalance their portfolios, we expect to see a big tick-up in secondary market opportunities. And so we’re watching that part of the market quite carefully.”

The co-investment segment of the market, meanwhile, where investors take stakes in a company alongside a private equity fund manager, was also looking more attractive in the post-COVID world, Ms Smith said.

“Fundraising is going to be tougher at the moment. So the fund sizes will be smaller, which will actually mean that the co-investment opportunities are larger, and that’s already where we’re seeing the most activity now and the best opportunities,” she said.

“Other investors might be a bit nervous and are waiting to see what happens, but we think if you’ve got the right knowledge about the sector, which we do, and the right opportunities, now is a good time to purchase assets, at lower prices, that other people might be a bit worried about.”

The global investment manager, with $10bn of private equity assets under management, in March launched a private equity fund for sophisticated Australian investors, the Schroders Specialist Private Equity Fund. It is a feeder fund for an underlying Luxembourg-domiciled fund that launched in September 2019 and currently has $100m in commitments. The fund invests in small-to-mid cap companies in the US and Europe, as well as Asian growth opportunities.

The fund, which is semi-liquid, allowing investors to redeem up to 5 per cent of its net asset value each quarter, is focused on healthcare, technology, consumer services and industrials, with 20 per cent of the portfolio in healthcare and a similar percentage in technology. It will look to continue investing in those segments of the market to take advantage of their strong performances through the COVID-19 pandemic, she said.

As Australia battles through its first recession in three decades, the Sydney-based Ms Smith, who was previously Schroders’ investment director for infrastructure finance, expects to see some asset managers exposed for overpaying on their investments.

“I think we could see a bit of a review in the way people are investing, because some of the prices that people have been paying just aren’t sustainable. That’s across the board: we’ve seen it in infrastructure as well,” she said.

Despite infrastructure long being viewed as a resilient asset class, downgrades of assets such as airports would expose managers who were investing based on the view that nothing could shake the asset class.

“I think it will really separate the very strong and very prudent managers from managers that cared more about growth and growing their assets under management versus making the best investments in the best interest of their clients,” she said.