Compounding private market returns

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By Luc Kicken and Liselotte Kuper, Client Solutions Benelux at Partners Group

As featured in LPEA Insight/ Out magazine #20, December 2021.

Even in today’s environment, many investors are consistently falling short of their private markets target allocations. Having ‘money in the ground’ is a key part of the private market return equation, and the crucial part to compound private market returns.

While it reflects the difficulty of forecasting private market calls/distributions and NAV developments, psychological and appropriate risk management barriers to commit more than the NAV target; it is not helped by the fact that it is exceedingly rare an investor’s commitment to a fund is ever fully called.

There are many investors who have successfully cracked the NAV target puzzle. A common point of attention of these investors – with decades of experience in private equity investing – is consistent annual deployment targets to spread vintages and maintain NAV targets, enabling compounding of private market returns.

For smaller investors, maintaining NAV targets and the compounding of returns can be much harder. To begin with, there are a myriad of opportunities to choose from. Achieving necessary diversification can increase the administrative burden and lead to a rather unmanageable amount of small capital calls and distributions. It takes time before any money is called, and due to the structure of private market funds and investments, many investors will hold cash on the sidelines before and after the investment holding period. 

Since its early beginnings, Partners Group has been at the forefront of making private market investments accessible to all type of investors and has created so-called open-end evergreen private market funds. These funds offer investors immediate exposure to a diversified private markets portfolio. Capital is called in one-go; all the monies are at work and ‘in the ground’ from day one. There is a monthly valuation of the fund. Investors can subscribe and redeem each month, subject to gating restrictions as described in the respective fund documents. All realizations in the portfolio are reinvested into new investments. Investors profit of immediate value creation in the more mature assets and future value creation is secured by the new investments. The typical J-curve is not a feature of these programs.

Partners Group is the market leader in these types of solutions, managing over USD 30bn in evergreen funds with a 20-year track record of outperforming its return targets. The success of these funds is related to Partners Group’s investment platform. First, there is a disciplined approach to the growth of the funds, favouring sustainable returns over maximizing assets. Nurturing the growth guarantees proper vintage diversification. Second, direct investments are the largest part of the portfolio. Direct investments make sure that new money coming into the funds is instantly invested. Third, the breadth of Partners Group’s investment platform generates a constant flow of investment opportunities. In 2021 alone, over 30 direct equity investments are allocated to our flagship evergreen funds, ensuring consistent high investment levels and diversification across the portfolio. Fourth, the investor base consists of many like-minded, long-term private market investors.

While at first sight the main benefit of evergreen funds may seem the administrative ease to access private market investments; the reality is that evergreen funds provide the opportunity to be fully invested and compound private market returns – a combination difficult to replicate for many investors.

Compounding returns in a single investment – re-underwriting Foncia       

When exiting, private equity managers are often divesting assets with continued, strong future growth prospects that they would rather hold onto for longer. These assets can benefit from extended periods of compounding.

Headquartered in Paris, Foncia provides a range of services primarily to residential property owners and tenants, including joint property management, lease management, letting, and brokerage services.

Partners Group acquired Foncia on behalf of its clients in 2016 and since then has significantly accelerated Foncia’s growth and market leadership position. In the last five years, Partners Group has transformed Foncia into a more institutionalized business, accelerated M&A activity, with over 260 acquisitions completed, and started the Company’s digital transformation through the in-house development of a new ERP software to tech-enable its services.

In 2021, Partners Group expanded the shareholder base of Foncia, and re-underwrote the Foncia investment. Foncia has compelling growth and value creation potential ahead. Partners Group will continue to lead the expansion of Foncia’s platform across Europe and complete its digital transformation.

Partners Group

Partners Group is a leading global private markets firm with 20 offices across the globe. It manages USD 119 billion in private equity, real estate, infrastructure and private debt on behalf of its global client base, with a growing base in Luxembourg.