Private equity is under increasing pressure to innovate in response to growing competition, according to Hylke Hertoghs and Bastiaan van Slobbe, managing partners at Marktlink Capital. Their firm provides investors with opportunities to access private equity through feeder funds and funds of funds, starting from €250,000.
In the past, private equity firms relied heavily on leveraging high levels of debt to drive returns, but that approach has shifted, says Hertoghs in an interview with Investment Officer. «The market is much more competitive now; it’s no longer acceptable to endlessly raise debt. There must be a clear plan for how to take a company to the next stage,» he said.
Hertoghs says he can choose from as many as 40,000 private equity funds from the US and Europe. «Each year, we start with a longlist of 400 funds and then engage with 50. Ultimately, we narrow it down to 10 to 12 funds for our funds of funds.»
New niches
Marktlink, which oversees about €1.7 billion in assets, observes that private equity firms are keen to differentiate themselves, leading to the emergence of new niches. One such area is GP-led secondaries, where a fund extends its hold on a company rather than selling it at the end of the fund’s life. «Previously, private equity firms had to sell when a fund neared its term’s end. Now, a company can be transferred to a new fund managed by the same firm, often involving an independent third party,» said Hertoghs.
CVC, for example, applied this model with the Italian online education group Multiversity. “Proceeds from a previous deal are reinvested in a new vehicle, allowing investors to support the company’s further growth for several more years. This has become a distinct segment, with funds specifically targeting these ‘trophy assets,’ where risks are perceived to be lower and returns are similar to traditional private equity.»
Hertoghs adds that such innovations are crucial for building a well-diversified private equity portfolio, especially for smaller investors. There is a growing demand among private individuals to invest in private equity. Recent reports indicate that firms like Altix, Helder Equity, and Capler are actively raising capital from retail investors through funds of funds.
Selection process
Marktlink is currently preparing its fifth fund and is already in discussions for funds six and seven, with a focus on Western and Northern Europe, and to a lesser extent, the US.
Around a quarter of each funds of funds at Marktlink consists of co-investments. “We highlight themes we believe have long-term potential,” Van Slobbe said, citing health care, social sustainability, and business software as key areas of focus.
“We aim for a diverse spread across the entire economic spectrum,» said Hertoghs. “This includes positions in consumer goods and manufacturing, among other sectors.”
The selection process starts with analysing historical data and industry metrics to assess a fund’s track record. “We dig into why a fund has been successful, identifying whether returns came from a few standout investments or were broad-based. It’s also essential to understand who drove that success,” he said. Building strong relationships with fund managers is crucial to gaining access to such detailed information, which Hertoghs views as Marktlink’s added value.
Costs and fees
Hertoghs acknowledges that private equity is an expensive asset class. “Fees at the underlying funds are already relatively high, and our selection process adds another layer of costs. However, if the selection is done well, the value added should far exceed the fees investors pay us. We also reduce costs by doing co-investments, where investors often receive discounts on fund fees.”
Marktlink’s fee structure varies based on the investment size, with management fees ranging from 0.25 percent for larger investors to just under one percent for smaller ones.
The firm uses a closed-end fund structure, aligned with the underlying investments. “Evergreen funds carry a greater risk that investors will misjudge their liquidity needs. High liquidity can also affect overall returns,” said Van Slobbe. “While evergreen and closed-end funds will continue to co-exist, each has distinct advantages and drawbacks.”
This article originally appeared in Dutch on InvestmentOfficer.nl.