Sean Frank is the Founder and Managing Partner at Cloud Equity Group, a boutique investment management firm specializing in leveraged buyouts of tech-enabled business service providers. In addition to being responsible for managing discretionary investor capital on behalf of its high net worth individual, family office, and institutional investor clients, Sean is a public speaker and has given talks at various industry conferences and college campuses including Harvard Business School.
The investment management field is an incredibly saturated industry and starting out can be difficult. “There is an over abundance of investment firms of all kinds that can boast strong teams, strong track records, and innovative investment strategies,” said Sean. “To be successful in today’s market, just checking those boxes isn’t enough – you need to find additional ways to stand out from everyone else.”
Sean outlines a few commonly perceived negatives about the private equity asset class and offers some suggestions as to how fund managers can address them to create a competitive advantage.
Deployment of Capital
The private equity asset class tends to be overcapitalized; it’s fairly common to hear stories of oversubscribed private equity funds that cannot find enough attractive investment opportunities and are essentially just forced to sit with dry powder. There’s an opportunity cost here for the committed investor capital that is left uninvested and not earning a return. Targeting underserved markets where there are more investment opportunities, or potentially lining up investment opportunities before a fund’s initial close, will allow a manager to deploy capital more quickly and add more value to the investor.
Of all the alternative asset classes out there, private equity tends to be the most illiquid and the least transparent. It’s not uncommon to hear about fund managers marking investments very aggressively to give the artificial appearance of strong performance, only to realize lesser gains upon asset liquidation. This creates an inherent risk to the investor and makes the asset class less appealing when compared to more liquid and transparent asset classes such as hedge funds. By creating a clear pricing policy, ideally using market comps and financial performance metrics, and by making this information available to investors, fund managers can help bridge this gap and thus add more credibility to their investment marks. As a result, this will boost overall investor confidence. In addition, third-party service providers such as auditors, fund administrators, and valuators can help add credibility to unrealized investment performance as well.
Private equity tends to be the least appealing asset class from a lockup period perspective given the ‘close-ended’ nature of the funds and the illiquidity of the underlying asset class. In recent years, the average lifespan of private equity funds has reached 13 years! By developing an investment strategy that can be executed quicker without diminishing returns, there is an opportunity for fund managers offering shorter fund lives to capture the interest of investors.