Equity firms to be like asset managers

The industry — once booming, but hit hard by the credit crunch — must also become better in adding value by turning businesses around rather than pure financial engineering, investors and fund managers said at a conference.

Many investors are building exposure to different types of risk, such as equity or credit, rather than investing in traditional asset classes, as they look for the cheapest way to beat markets, said Charles Baillie, global co-head of alternative investments at Goldman Sachs.

“Our view is that the future will be dominated by multi-asset class models or very focused models,” Baillie told the SuperInvestor conference in Paris on Wednesday.

As they have grown in size, large U.S. private equity firms, such as Blackstone, KKR and Apollo, have spread their wings into new fields like real estate, hedge funds and general asset management.

The so-called supermarket model is heavily criticized though, and large counterparts in Europe have remained focused on buyout deals, expanding their scope out of western Europe into eastern Europe, Asia and the Americas.

As they look to maximize returns, some investors are demanding a clearly focused strategy and are backing firms that can show they are different from the rest of the pack.

“We probably have a preference for more focused groups,” said Ralph Aerni, chief investment officer of investor Strategic Capital Management (SCM).

Despite its preference, SCM is still backing firms like TPG , Blackstone or KKR, as they provide the only means of getting exposure to the big buyout deals that have outperformed the market, said Aerni.

Big buyout firms in the boom years became populated with banking experts as their deals took on more of a financial focus, fed by easily available credit which they used to fund their huge leveraged buyouts (LBOs).

They have been struggling to do new deals as debt financing has become harder to secure, while at the same time witnessing existing portfolio companies pushed to breaking point by the excessive use of leverage and a downturn in sales.

But as they look forward to an anticipated pick up in deals, both investors and private equity houses say hands-on management will characterize the next phase of the buyout cycle, rather than financial engineering.

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