Permira’s co-founder Kurt Björklund is fresh from raising $12 billion for buyouts and is contemplating how to deploy funds at a time when acquisition targets look pricey.
Björklund thinks that the answer lies in specialisation. The London-based private equity firm is doubling down on a few key areas of the economy: technology, consumer products, financial services, healthcare, industrial tech and services sectors.
“We have good pattern recognition,” Kurt Björklund, co-managing partner at Permira, tells FinanceAsia in an interview, meaning that the global investor can leverage specialist industrial knowledge gleaned in one corner of the world and apply it in another.
Specialist funds are increasingly common in the US and Europe but nascent across the Asian Pacific where they are mostly generalists.
In the West, “people have picked their spots,” said Björklund. He cites the enterprise software sector where he reckons there are only five or six private equity firms, including Permira, that have developed sufficient expertise to be strong competitors.
“The industry in Asia has been more focused on building geographic capability,” Björklund said during a visit to the firm’s Asia headquarters in Hong Kong.
If fund managers are well-versed in an industry’s dynamics then they can price companies more accurately, a useful skill when many target companies are priced close to perfection. Such buyer expertise also crystallises greater value for the seller.
“That creates a more disciplined competitive environment,” Björklund said, describing auctions for companies among knowledgeable and rational buyers.
The development also spells danger for the more generalist private equity firms across Asia. “If you're not in that pool of a handful of firms that do that, it's really hard to compete,” he said.
Investors in private equity, called limited partners (LPs), also appear to see the value in specialisation, handing them an advantage in capital raising. Specialists can raise new funds more quickly than generalists, a 2016 study in The Quarterly Review of Economics and Finance found.
Björklund’s comments come at a time when LPs are getting skittish about valuations.
LPs see high prices as the most significant risk to their future returns from private equity firms, according to a survey by secondary market investor Coller Capital.
It’s a “pretty aggressive market at this time” acknowledges Björklund, who joined the firm in 1996 and became co-managing partner of Permira in 2008. He has seen markets turn sour and rebound several times as an investor.
“I wouldn't be surprised if, during the deployment of our seventh fund, we would both have the current sort of environment, where you just have to be super disciplined on where to play, and also much more volatile and perhaps much weaker markets and macro environment.”
A TECH BUBBLE?
One sector of the economy where companies look particularly pricey by historical standards across the world is technology, a key focus of Permira – and increasingly among its competitors.
“Investing in the tech space as a vertical is hard because valuations are super high,” Björklund explained. “The significant majority of companies in [the tech] space today have valuations driven by momentum economics, not fundamental economics. You have to be really careful.”
This is particularly true in China, where 85% of all deals went to tech-related startups last year. Tech and internet investments accounted for around half of all private equity deals in Asia, according to a report by Bain. The Chinese tech sector is a “speculative investment bubble that could burst,” the consulting firm added.
Permira is well-placed to sift through companies; it has tech in its DNA. Founded in 1985 as Schroder Ventures, Permira invested with success in early-stage technology deals in the 1990s and continues to evolve with technology. Over the past decade, its investments in consumer retail have shifted from Big Food and Big Brands to online native business models.
Technology developments continue to drive the firm’s investment ideas. Björklund estimates that around 30% to 40% of Permira’s funds have been ploughed into technology-focused companies. That amounts to nearly $10 billion since the company launched, according to the firm’s website.
Five out of six members of Permira’s investment committee are dyed-in-the-wool technology investors. Björklund, who chairs the investment committee, is one of them.
The 50-year old Finn has been involved in several technology transactions including Swedish software developer AU System, British-based satellite telco Inmarsat and Danish cable operator TDC. Björklund currently serves on the board of online Korean cosmetics retailer Althea.
The amount of capital that Permira dedicates to tech investments is set to rise, even as concerns of a bubble mount. Björklund remains confident that the firm won’t trip up. “We have been around too long to be seduced by that game,” he said.
PROOF OF CONCEPT
The success of Permira’s investment thesis has meant that Permira was able to raise just over €11 billion (around $12.2 billion) from about 120 LPs for its seventh buyout fund in around 12 months. Permira managed to draw in a larger number of Asian-based pension funds, insurance companies and sovereign wealth funds into its latest flagship fund.
Its solid track record helped give new LPs confidence. Permira’s 2006 IV fund, raised just before the Global Financial Crisis, is tracking at a 7.7% net IRR, while the firm’s fifth fund is at 16.2% net IRR according to the California Public Employees’ Retirement System (Calpers).
Calpers’ numbers, however, are depressed by foreign currency translation costs as Permira’s funds are denominated in euros. The figures are also lagging and don’t account for the firm’s recent successful exits, including from German software provider TeamViewer and US digital legal service LegalZoom.
“Over the last five quarters, [Permira V] has matured substantially as a consequence of exits,” Björklund said.
Two-thirds of the capital raised for Permira VII came from investors in Europe and North America, 12% from the Middle East, while funds from Asia accounted for 21% of total capital raised. Its Asian LPs included Taiwan’s Fubon Life Insurance and China Life Insurance.
“It is crucial for us to have a strong and supportive Asian LP base going forward,” said Björklund.