As pressure mounts on investors to allocate larger portions of their portfolios to alternatives, Stuart Dunbar, a partner and director at Edinburgh-based investment manager Baillie Gifford, stresses the need for careful consideration. He highlights the limited supply of high-quality opportunities as a critical factor. “We can’t just rush into the alternatives.”
Dunbar provides a two-pronged response when asked about the future role of private equity and alternative investments in institutional portfolios. He expresses both optimism and caution: “We have to be very careful about rushing to deploy capital. It will take as long as it takes,” he warns during this IO Talks podcast interview.
With approximately 266 billion euros under management, Baillie Gifford is increasing its presence in continental Europe, having recently inaugurated a Benelux office in Amsterdam. The Scottish asset management firm has felt the impact of Brexit, necessitating closer proximity to its European clients. “We’re having to localise servicing, due to the negative outcomes of Brexit,” Dunbar concedes.
In the interview, Dunbar elucidates his vision of the perfect client. “Firstly, someone who challenges our thinking. We relish clients from whom we can learn. We don’t presume to know everything,” he says. He values clients with a keen focus on long-term fundamentals and encourages discussions centred around the inherent challenges of investing.
Capital-light growth
Baillie Gifford’s long-term perspective also drives its interest in private equity. The firm has been involved in private equity for over a decade, acknowledging the high potential of capital-light growth companies early on.
According to Dunbar, developing an internal infrastructure to facilitate these investments was a pivotal commitment for Baillie Gifford. The initiative has given rise to dedicated private equity vehicles that better serve its clientele. “We now have a fund in the UK which actually trades on the alternative investment market, along with a more traditional GP-LP structure, primarily for North American clients,” Dunbar explains.
He emphasises that the approach to company analysis is similar for private and public companies, with the firm focusing on large-scale pre-IPO private investments and maintaining these investments through the listing process. Often, Baillie Gifford purchases more shares post-IPO for clients unable to participate in the private investment.
Widening gap
The context for private equity investments remains challenging. Bain consultancy indicates a significant decline in private capital fundraising and a widening gap between supply and demand, evoking memories of the 2008 global financial crisis.
Approximately 13,900 funds worldwide are seeking investments for their combined capital of 3.3 trillion dollars. Projected global fundraising totals for 2023 hover around 1 trillion dollars. The projected gap of 3.2x is the widest since the Global Financial Crisis. Based on activity from the first half of the year, Bain predicts a 28% drop in full-year fundraising totals compared with 2022, with the number of funds closed also expected to decrease by nearly half.
In Luxembourg, a major hub for private equity managing around 400 billion euros, this market outlook is met with some unease.
Baillie Gifford’s Amsterdam-based Benelux office brings the firm closer to Luxembourg’s favourable legal environment for structuring alternative funds. While no specific plans are in place, Dunbar does see potential for new ventures in the future.
Steady stream
To thrive in the private equity space, a steady stream of investable capital is necessary, notes Dunbar. “We aspire to be an attractive shareholder for the most intriguing companies. It’s reciprocal - we must be invited to become shareholders in private firms. This necessitates careful, long-term consideration of maintaining good relationships with the firms we invest in. It’s a virtuous circle.”
Dunbar affirms the importance of focusing on disruptive, innovative companies that create wealth, irrespective of whether they are private or public. He underscores the need for quality in implementation, cautioning against a hasty embrace of alternative investments as a panacea.
“It doesn’t matter whether it’s private or public,” he says. “What matters is: Are there really good, disruptive, innovative companies out there that are creating wealth through the activities? I don’t want to say negative and positive, but I think we have to be quite careful about the quality that we have. We can’t just rush into the alternatives.”
In navigating the shifting tides of private equity, Baillie Gifford embodies a blend of calculated strategy and prudence. Their focus is on the quality of investments rather than the speed of capital deployment. Amid a complex investment landscape, such an approach is not just judicious, but indispensable.
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