Thankfully, Byron Bay’s voracious shark population spared Hollie Briggs, as she swam off Tallow Beach for an hour. That meant the head of global product management for the Growth Equity. Strategies Team at Loomis, Sayles & Co. could take the Investment Leaders Forum audience on an entertaining journey through the world of behavioural biases in investing.
In a wide-ranging and deeply considered contribution at the Investment Leaders Forum in Byron Bay, Hugh Selby-Smith, co-chief investment officer at Talaria Asset Management, delivered a compelling challenge to conventional portfolio thinking.
Delving further and deeper in the PE ocean improves the catch
When Tyler Jayroe told a friend he was visiting Australia for The Inside Network’s Alternatives Symposium, the friend – a marine life enthusiast – told him how envious he was, as he has always wanted to experience Australia’s rich sea-creature endowment.
In the conversation, his friend went on to say that scientists estimate that up to 90 per cent of deep-sea species remain undiscovered to this day. “That’s just like private markets: 85 per cent of companies in the US that earn US$100 million or more of revenue in are privately held,” Jayroe, a portfolio manager in the Private Equity Group (PEG) at J. P. Morgan Asset Management in New York, told the Alternatives Symposium. “If you are only investing in public equities, you’re limiting yourself to the crowded coastal waters. Of course, there’s some great catches there, but there’s a whole ocean of opportunities out there – just to stretch this metaphor – looking at privately owned companies.”
The J. P. Morgan PEG investment universe takes in the small-to-mid market end of the US buyout market – companies with annual revenues of $10 million to $300 million. Jayroe said there were about 104,000 such companies – an opportunity set 10 times greater than the the opportunity set available to large-cap PE firms. “This part of the market generally offers lower average entry prices, lower leverage multiples, and identifiable value creation opportunities,” he said. “There is less competition, as it’s already a pretty inefficient end of the market.”
Most of the time, these companies are “really not big brand names,” he said. “Often, in private equity, boring is beautiful. We’ve invested in businesses as mundane as commercial door repair and maintenance business – the kind of sustainable, recurring-service, high-margin businesses that are the fabric of our economy. But sometimes they’re also things that consumers would touch and feel.”
The candidates are often founder-owned or family-owned businesses, Jayroe said. “That’s really what we’re focused on at J. P. Morgan, finding these companies, and working with the private equity partners that we’ve developed to help them take those companies to the next level. We get involved and do add-on acquisitions, invest for growth, bring in a professional management team, do all of the things that are sustainable sources of value creation, apart from financial engineering.”
He gave the example of hair care company Amika, in which PEG invested in 2022. “The husband-and-wife founders had done a great job with Amika since they established the brand (in 2009), building it organically, really; without much professionalisation or marketing dollars, they had built the fastest-growing haircare brand in the market, that obviously really resonated with its customer base. But what they needed was professionalisation,” he said.
Along came consumer investment private equity firm Bansk Group. “We invested alongside Bansk, which brought in a professional CEO, who had been the number two at a publicly traded hair care company, and they were able to transform this business really quickly, and take it to the next level, by consolidating vendors, focusing on the key stock-keeping units (SKUs), and investing in marketing,” said Jayroe. “Over the past two years, the company has grown its revenue by over 80 per cent, increased EBITDA (earnings before interest, tax, depreciation and amortisation) by over three times, and it’s doubled its margins. That just gives you a little bit of a sense of the kind of really interesting fast-growing businesses, where we can make very good returns and turn them into targets for either larger strategic investors or bigger private equity firms.”
J. P. Morgan PEG works across all three parts of the private equity world: primary investments, where it identifies and partners with top-tier private equity firms, with potential for co-investment; ‘secondary’ opportunities (more than half the portfolio), in which it buys positions in existing private equity funds or assets, giving it a shorter path to liquidity; and co-investments (the second-largest portion of the portfolio), where it makes targeted investments alongside high-quality general partners (GPs) in companies with
attractive economics. In co-investments, J. P. Morgan PEG is looking for diversified sector exposure, stressing consumer staples, healthcare, business services, and technology. Across all three sectors, the group assesses more than 1,000 investment opportunities a year, and invests in less than 100.
“We’ve been able to focus both on secondaries and co-investments as real alpha generators, in addition to our primary program, where we’re able to establish relationships with over 250 general partners at the moment, on the secondary side, we’re really focused on acquiring limited partners’ interests in funds,” said Jayroe. “That’s LP-led secondaries, traditional deals where we’re leveraging our primary relationships and finding interesting opportunities to acquire high-quality assets at attractive valuations, and often in off-market-type transactions where the GP is quite restrictive, it’s looking for investors like ourselves who are committed to investing in that end of the market, and have the capability to invest on a primary basis as well.”
In a relatively slower fundraising environment, he said, many GPs are looking for capital from their LPs to help them consummate transactions. “We’ve been able to expand our capabilities such that we’re effectively co-underwriting deals alongside our partners, in some cases, providing them with that extra capital to help make sure that they, the sellers and intermediaries they’re working with, know that they’ve got the capital behind them to close deals. That gives us an opportunity to evaluate them and the companies on a real first-hand basis, and it helps us to secure sizeable allocations to these deals,” Jayroe said.
“We’ve learned a number of lessons around customer concentration, cyclicality of industries, commodity risk, and things like that, but where you really want to hone-in is perhaps in some themes that are less-well understood. That could be an orphan brand in the consumer space, or a category that’s become less in favour. The founder-owned businesses are still a great way to play the private equity game, because that’s the real opportunity for margin enhancement and also to grow in fragmented industries through acquisitions.”
Jayroe said it has been “exciting” to offer an open-ended, periodic-liquidity, ‘evergreen’ private equity strategy to advisers’ wholesale clients in the Australian market. “One of the things I find interesting over the past 20 years, since I’ve been doing this, is really this democratisation of alternatives, these evergreen structures, which I think solve a lot of the friction that has been an impediment to private wealth investors coming into the asset class,” he said.
