Speaking at Aureos Capital’s ten anniversary investor day in London this week, chief executive Sev Vettivetpillai said it’s time for the private equity industry to rethink its business model.
“Exits through the IPO markets cannot be our main mechanism for producing returns for fund investors,” he told the audience of 120 prospective investors. “The last three years have more than vindicated that approach, with an almost-unprecedented slowing in IPO activity across both the developed and emerging markets.”
Instead, Vettivetpillai advocates a bigger focus on structuring deals using dividends or other mechanisms to realise cash from a growing business, which would result in less volatile returns and boost investors’ confidence.
He explained: “Even in developed markets, some funds are having to wait indefinitely for the right moment to launch an IPO. With the medium term economic outlook still far from certain, private equity investors may want to look closely at how they could secure a more stable flow of cash from a business rather than depend on the magic of leverage and the return of pre-crisis IPO valuations.”
Aureos Capital specialises in emerging market SMEs, and historically has made extensive use of geared structures or preferred instruments carrying the rights to dividends or stock redemptions that generate cash flow.
It’s a model that works for Aureos: nearly 50 per cent of its investments use these instruments and the yield on its income-generating structures account for 15 per cent of investment returns.
“There is still a small minority of private equity investments in startups where dividend payments might hamper the growth of the company, but in most of our investments, generating early cash flow, while still benefitting front he potential upside of the investment would be quite normal,” Vettivetpillai added.