Active Investment Management in Private Equity

Kensington strongly believes that successful private equity investment requires active management by fund managers with significant experience in business operations and strategy as well as a high level of financial expertise. This combination of skills is typically found in senior fund management teams consisting of professionals with experience in each of the relevant areas, who can work together effectively over the life of each investment made by their fund.

At the investment selection stage, business operating skills are necessary to identify promising business opportunities and evaluate management teams. The key focus at this stage is the investment thesis: the investor’s plan for creating additional value in the operation of the business. This new value may result from planned new products, entering new markets or the development of an innovative new strategy, but it must clearly present a plan for value creation built upon the new injection of the investor’s capital.

Once an investment has been made in a particular company, the most effective private equity managers will play an ongoing role as board members and strategic advisors to the business, to ensure that the investment thesis is properly executed. In many cases, this includes actively stepping into a direct operating role for a period of time to take advantage of a particular opportunity or manage through a transition period. Since the investment thesis frequently involves a new approach, it is normal for unexpected issues to arise during the execution stage. Strong operational and strategic talent within the fund manager’s team can make the difference between success and failure. Financial expertise is required in every investment to effectively price, structure and complete the transactions, to ensure that portfolio companies are effectively financed as required from time to time and to facilitate exit transactions, as well as for general portfolio management.

During the 1980’s, buyout investors focused on identifying companies which were undervalued by the public markets, and which could be acquired and broken up into parts to be sold off at a profit. Complex financial engineering skills used to be a key differentiator for successful private equity funds in the 1990’s, as new financial instruments, and innovative structures were developed to minimize risk and maximize returns for the equity investor. It remains necessary for private equity fund managers to understand and deploy these deal structuring skills, however, they are now a core feature of the industry and no longer a strategic differentiator for any particular fund.

In Kensington’s view, private equity investment today is based on true value added relationships between investors and their portfolio companies. The most effective private equity investors do not rely solely on bargain prices or financial engineering to achieve strong returns. Instead, they contribute additional value to the businesses in which they invest, in an effort to achieve top quartile investment performance on a continuing basis. Moreover, as capital is widely available today from numerous sources, private equity managers must offer more than just funding in order to be selected by the best companies as desirable financial partners.

Kensington seeks to invest in private equity fund managers having the right combination of business and financial expertise required to add substantial value to their portfolio investments over time. Kensington believes that this type of active investment management is essential for strong financial returns in today’s private equity markets.

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