Private Markets: Short term hype or future proof?

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Investors’ appetite for private assets – those that are unlisted on a securities exchange – has exploded in recent years. And fund-raising looks set to hit new highs in 2021.

What’s more, the rise of private assets has become a global phenomenon: whereas in the past the market was dominated by US investors, the enthusiasm of investors in the rest of the world to allocate to private markets is catching up.

Do you want to find out how an allocation to this asset class could benefit your portfolio? What our views are on the growth of the market, the sweet spots and our sustainable approach? If so please register for our webinar on Thursday 4 November, 10:00 CET.

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Spotlight on the most compelling opportunities with Private Markets.



In this final blog in our series on our private markets strategy, we will look at some of the most compelling investment opportunities in Private Markets which currently advance in our investment pipeline.

We currently manage a broad Private Markets strategy with over EUR 250m assets under management which is well diversified across private equity, both venture capital and buyout capital, and real assets, comprising infrastructure, land and real estate. We have an exciting investment pipeline of over EUR 100m.

Real Assets: exploit long-term megatrends
With rising valuations and compressed yields we will put more emphasis on development of new assets in so called “build-to-core” strategies relative to fully operational income generating core assets. The attractiveness of development built-to-core strategy is that you can harvest a development risk premium and also benefit from attractive valuations once the assets are fully operational. We have built long term relations with investment partners who have multi-decade experience in developing and operating assets within their respective niche segments. The quality, experience and prudent investment process of our partners mitigate the development risk substantially. We also emphasize on segments which are supported by long term megatrends such as the energy transition, communication, healthy food and ecommerce.

A key attention point is capital deployment. Developing assets up to the point that these are fully operational takes time. We have therefore prioritized on secondaries and co-investments in our investment pipeline. We also have prioritized on primary investment opportunities with above average capital deployment pace.

Venture capital: focus on the unicorns in Europe 
Within our venture capital portfolio we’re focusing our investments on Europe, which has huge potential to catch up with the US – the traditional home of venture capital investments. In recent years, Europe has become much more attractive for venture capital investors: there are now more computer programmers in Europe than the US, and the number of European unicorns – unlisted companies valued at USD 1 billion or more – has increased hugely in recent years, in a sign of the increased entrepreneurialism in the region. An additional benefit of focusing on Europe is that the region is diverse in terms of cultures. Conversely, we have no investments in Asia at present. This is a region we’re pleased to have no exposure to given the problems in the Chinese property market and the regulatory crackdown that has affected a number of Chinese sectors. 

Venture capital is one of the few asset classes in which we can observe performance persistence, whereby funds that have outperformed in the past tend to continue to outperform. This is essentially a self-fulfilling prophecy – the best start-up companies generally choose the venture capital funds with the best track records and reputations to invest in them, and vice versa1. From the start of our strategy in 2018 we have backed some of the most successful European venture capital investment partners. Each one of them continues to deliver top quartile performance and we are glad to participate in successor funds raisings. These venture capital investment partners are capacity constrained and we feel privileged to be long term partners with them.

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1:Notwithstanding some great emerging VC funds, there are of course always exceptions to the norm.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

How we apply a sustainable approach to our private markets portfolio



At Kempen sustainability comes as standard in everything we do, and our private markets strategy is no exception – even though investors sometimes perceive incorporating ESG criteria to be more difficult when managing unlisted assets. Let’s take a look at how we do so, thus helping investors in our private markets strategy meet their sustainability goals and contribute to solving some of the world’s most pressing challenges.

Monitoring the ESG credentials of our investment partners
First and foremost, we look to ensure that the investment partners we work with integrate ESG in their investment processes. Our partners are generally the majority shareholders or minority control shareholders of the companies they invest in, which means they’re well placed to implement ESG policies. We exclude any partners investing in firms whose ESG policies and practice are not aligned the United Nations Principles for Responsible Investment, perform in-depth ESG analysis on the partners we work with, engage with them about their ESG profile and, wherever possible, aim to invest in partners making a positive impact with their investments. Notwithstanding there are challenges to integrate ESG in our investment process. Within Private Markets, many investment partners effectively align their policy with UNPRI principles, but they are often not signatories. Measurement, reporting and benchmarking of ESG KPI’s is more challenging due to the nature of smaller investments, and absence of an investor relation department tasked with producing ESG reports common in the public markets. 

What does this look like in practice? Let’s consider our farmland investments as an example. We only invest in farmland managers who take ESG seriously. Our partners ask their tenants to exploit their land in a sustainable way, ensure they use water efficiently through cutting-edge irrigation systems, use natural fertilisers rather than artificial chemicals wherever possible, and ensure areas around their plots of land are allowed to grow wild to foster biodiversity.

Meanwhile, many of our investment partners invest in firms helping solve environmental or social problems. For example, one invests in Hopin, an online conferencing platform. It’s expected that in the future, conferences will be more hybrid in nature – some people will attend in person, others online. Hopin has developed a suite of software that enables online and in-person attendees to interact with each other as if they were together. In doing so, it is helping cut carbon emissions by reducing the need for people to travel to conferences. What’s more, it has also demonstrated its huge return potential: its valuation has risen to USD 7.75 billion in just 2 years1.

Co-investment case studies
We don’t just invest in other private equity managers’ funds – we also make co-investments, in which we make a direct investment in a company alongside a private equity manager. Doing so enables us to take stakes in companies making a positive impact in a variety of ways.

Bäckhammar
We made a co-investment in Bäckhammar, a wind farm in Sweden, together with KGAL, a pioneering European sustainable energy investor, in 2018. This greenfield development project began in the middle of that year and was completed in Q3 2020.  Bäckhammar’s estimated installed capacity of 130 MW is generated by 31 turbines2. During its lifespan, the windfarm is expected to avoid over 2.7 million tonnes of CO₂ emissions – the equivalent of keeping 2.4 million barrels of oil underground per year. 

Some of the risks involved in the investment were already off the table when we got involved in the project – the windfarm’s construction had already been approved by the local government. The main risk we were exposed to was changes in the price of the electricity it generates. However, during construction,  a long term contract was signed with Amazon for a fixed price for about 70% of its capacity, significantly reducing this risk. 

In general we believe in the investment case for renewable development projects due to the market’s strong appetite for renewable energy assets as the world aims to move towards net zero.

AJM Healthcare
AJM Healthcare, which we took a co-investment stake in in 2018 with Westbridge, is a UK company involved in the supply and maintenance of equipment used in healthcare settings, such as wheelchairs and temporary hospital beds. The firm’s products and services enable patients and people in need to spend more time in their homes rather than in hospitals, and it has won a number of contracts with the UK’s National Health Service to help them do so.

Together with Westbridge we have supported several initiatives at the company during the course of our holding. For example, an experienced industry chairman was appointed and the management team strengthened, including with the appointment of a chief operating officer and clinical director. The firm’s headquarters were moved to strategically position the company and centralise its core business functions. Westbridge helped AJM enhance its clinical and corporate governance, refine its operational processes, introduce new IT systems and review its approach to tendering, which was instrumental in helping it win some major contracts. 

In general our strategy is to invest in small buyout private equity investments, entering deals at attractive valuation multiples before growing and professionalising the business. In the process we aim to upgrade the company to a medium-sized business, a market segment in which valuation multiples are generally higher. This is what we have achieved with AJM Healthcare, which has delivered an attractive positive return for our portfolio. 

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1:https://entrepreneurshandbook.co/hyperscaling-hopin-fc457e48886f
2:https://www.kgal.de/en/newsdesk/pressnews/detail/kgal-espf-4-fund-invests-in-wind-farm/

Tune into our webinar

To find out more about how we incorporate sustainability in our private markets strategy and much more, please register for our webinar on November 4th, 10:00 CET.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is prepared by the fund managers of Private Markets (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might hold position in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

The value of your investment may fluctuate, past performance is no guarantee for the future. Do not take unnecessary risks. Before you invest, it is important that you are aware of and are informed about the characteristics and risks of investing. This information can be found in the available documents of the strategy and/or in the agreements that are part of the service you choose or have chosen.

Focusing on the sweet spots of the private markets

In our first blog we talked about the growth of private assets and the benefits an allocation to the asset class can provide to investors. Here, we look at the way we manage our private markets strategy at Kempen. 

A one-stop shop for anyone looking for access to private markets

At Kempen we provide diversified exposure to private markets by investing in four distinct areas that would appear on the equity side of the balance sheet: private equity (buyout and venture), infrastructure, land (farmland and forestry) and real estate. These segments provide exposure to assets with characteristics that are generally difficult to find in the listed equity universe. 

In private equity buyout we focus on investing in first-time private-equity-owned small- to medium-sized businesses that have considerable scope to professionalise, internationalise and diversify their client base. Private equity large- / mega-cap buyout investments, by contrast, are often large multinationals that have already been in the hands of multiple private equity investors and undergone several rounds of optimisation and restructuring, so there is limited scope to add value. They also tend to have higher valuations and more debt than smaller firms. The figures back this up: small buyout has historically outperformed large buyout.

Venture capital provides exposure to innovative, fast-growing start-ups, often in technology, whereas listed equity provides exposure to more mature, bigger technology companies. A lot of ground-breaking innovation comes from start-ups, and they are staying private for longer. What’s more, large corporates, and especially big tech firms, often have huge corporate venture capital arms to acquire breakout start-ups. This means that investors who want to capture the returns derived from technical innovation are increasingly turning to venture capital.

In infrastructure and real estate we tend to invest in small- to medium-sized assets, often in niche areas that are difficult to access in the listed universe, and that have scope for efficiency gains to be made. 

Finally, we are able to source many attractive opportunities within the private forestry & farmland universe, whereas the listed market in this area is negligible.

Thanks to our unique combination of four areas within private markets, our strategy essentially represents a one-stop shop for investors looking to allocate to private markets.

Focusing on the sweet spots
A benefit of our approach, in which we invest in four distinct areas within the private markets universe, is that we’re able to concentrate our investments in what we perceive to be the sweet spots of each area without having an undue effect on our portfolio’s level of diversification. 

For example, within real estate we’re currently focusing on residential properties, and may add logistics assets in due course. This means we have no exposure to retail and offices – areas that are challenged due to trends such as online shopping and working from home, which only accelerated since the start of the pandemic. 

Similarly, we take a highly selective approach in infrastructure, generally focusing on themes benefitting from their link to multi-decade megatrends, such as renewable energy and communication. 

Meanwhile, in private equity we focus on the smallest deals, where managers have much more scope to add value than in larger companies, for which lots of leverage is typically used to generate returns. 

Finding the best partners
We invest in specialist private market managers’ funds and also make co-investments, only choosing to work  with the best partners based on our extensive due diligence process. And just like our selective approach to each of the four areas we focus on, we take a highly selective approach when choosing our managers, only investing in specialists in particular areas rather than with generalists.

For example, within venture capital we invest in a highly specialised biotech venture capital fund. This general partner has an investment team of around 20 people, 15 of whom have a degree or PhD in medicine, so they have in-depth knowledge of pharma. The firm has been around for nearly two decades and has been very successful in its biotech niche, which is benefitting from a number of fundamental growth drivers. At the same time, entry barriers for new investors are high.   

Liquidity by design
Given the nature of their underlying investments it’s very rare for private market funds to offer quarterly liquidity, which is what our strategy aims to provide in normal market conditions after an initial lock-up period of just three years².

This capability is fully embedded in the product’s design: we invest in both open-ended and closed-end primary fund commitments as well as secondary fund investments and direct co-investments. We have balanced our allocation to each of the private market categories, targetting a 60% allocation to the so-called real asset categories of infrastructure, land and real estate and a 40% allocation to private equity. The strategy’s cash conversion cycle of roughly five years means we should be able to offer a reasonable level of liquidity to our investors under normal circumstances. That said, investors in private markets need to have a long-term investment horizon to fully capture the return premium and should be prepared for scenarios in which liquidity is not readily available. 

An experienced team able to obtain privileged access to some of the best funds
The five members of our team have 18 years of investment experience on average, over which time they’ve built up in-depth understanding of their areas of expertise. Our selective approach to investment enables them to concentrate on sweet spots rather than whole asset classes.

An additional benefit of our team’s experience is that the members have established excellent relationships with investment partners in the market over the course of many years. In some cases, this means we can gain privileged access to funds that aren’t accessible to many investors. 

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1: https://www.efront.com/wp-content/uploads/2019/05/FrontLine_May.pdf 
2:There is no guarantee that withdrawals will be executed immediately due to the lower liquidity of underlying investments. The strategy is not obliged to sell an investment to facilitate a withdrawal.

Tune into our webinar

To find out more about our how we run our private markets strategy and much more, please register for our webinar on November 4th, 10:00 CET.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and is authorised to provide investment services, and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, investment recommendations, research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views only at the date of issue. These may be subject to change at any given time, without prior notice.

How to take part in the growth of the private assets market?

Investors’ appetite for private assets – those that are unlisted on a securities exchange – has exploded in recent years. According to research by McKinsey, total assets under management in private markets shot up from USD 4.7 trillion in 2016 to USD 7.3 trillion by the end of 2020¹. And fund-raising looks set to hit new highs in 2021 after a short blip in 2020 due to the pandemic, showing investors remain confident in the asset class in the post-covid era.

What’s more, the rise of private assets has become a global phenomenon: whereas in the past the market was dominated by US investors, the enthusiasm of investors in the rest of the world to allocate to private markets is catching up.

A range of compelling benefits
What’s behind the huge increase in the size of the private market in recent years? There are a number of drivers.

The most obvious is that private assets provide the potential for high returns that are very difficult to come by elsewhere in the current environment. Over the long term the asset class has significantly outperformed traditional public asset classes, and our broad private markets strategy targets long-term annualised net returns of 8–10% per year². That makes it a compelling proposition at a time that many fixed income assets are still yielding close to zero.

Another is that private markets provide access to sources of growth that are often hard to access in listed markets. For example, private equity provides exposure to early-stage growth that investors concentrating solely on the listed markets risk missing out on. This is particularly apparent in the tech sector, where companies are choosing to remain private for longer than they did in the past as there is more private capital around to fund their growth. Similarly, investing direct in areas like real estate, infrastructure and farmland provides access to a range of opportunities that often aren’t available in the listed universe due to smaller asset value of the respective investments.

Possibly the biggest advantage of an allocation to private markets is the diversification benefits it can bring to a balanced portfolio. At Kempen our strategy invests in four kinds of private asset, all of which are complementary to the investments available in listed markets: private equity (including buyout and venture capital), infrastructure, real estate and land (including both forestry & farmland). Private equity provides access to smaller, faster-growing firms that have more scope to be improved than listed stocks. In infrastructure and real estate we tend to invest in smaller, more niche areas than listed funds, while forestry & farmland provides a range of attractive privately held opportunities that are simply not available on the listed market.

Finally, individual private assets may provide specific benefits.  For example, real assets –infrastructure, real estate and land – have scope to act as a hedge against inflation. This attribute could be particularly attractive against the current backdrop of rising debt levels around the world. Meanwhile, farmland should act as a natural hedge against climate change: if the world doesn’t achieve net-zero by 2050 there will be more pressure on food production, so farmland should rise in value.  

Ability to incorporate ESG
The desire to do good has moved to the top of many investors’ agendas in recent years, and private markets provides plenty of scope for investors to help make the world a better place. 

We ensure we only invest with partners with impressive sustainability credentials and regularly engage with them on the ESG profiles of their underlying investments. We also take exposure to such diverse areas as renewable energy plants, sustainable farmland and forests, and drug developers, all of which are involved in tackling some of the major challenges the world is facing. 

Making private markets accessible to a new range of investors
There aren’t many free lunches to be found in the world of investments, and private markets are no exception as the asset class involves two main drawbacks. First, investors typically have to accept a high degree of illiquidity, committing to their assets being locked up for around 10 years. Second, private asset managers often demand investors allocate at least EUR 5 million to the asset class.

At Kempen we’re delighted to be able to make private markets a realistic option for a broader range of investors. First, we ask our clients to commit their money to our strategy for a minimum period of three years, after which we aim to offer them quarterly liquidity under normal market conditions³. Second, we ask for a minimum of investment of EUR 125,000 – below what many other asset managers generally demand. Thanks to the discounts we’re able to negotiate with our partners, we’re also able to provide access to our strategy at highly competitive fees.

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1: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/mckinseys-private-markets-annual-review, April 21 2021
2: The value of your investment may fluctuate. Results achieved in the past offer no guarantee for the future. Before you invest, it’s important that you are aware of and informed about the characteristics and risks of investing. This information can be found in the available strategy documents via www.kempen.com
3: There is no guarantee that withdrawals will be executed immediately due to the lower liquidity of underlying investments. The strategy is not obliged to sell an investment to facilitate a withdrawal.

Tune into our webinar

To find out more about our private markets strategy and the potential benefits an allocation to the asset class could provide, please register for our webinar on November 4th.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and is authorised to provide investment services, and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, investment recommendations, research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views only at the date of issue. These may be subject to change at any given time, without prior notice.