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Hermes GPE / Insights / Enhancing returns via a customised investment model

Enhancing returns via a customised investment model

In 2010, Hermes GPE took over the management of a sizeable legacy fund of funds portfolio for a major pension fund, which represented that investor’s principal private equity exposure. The portfolio was dominated by large cap Developed Markets (DM) buyout funds and as a result was characterised by slow deployment – which was aggravating the high drag on performance from a double layer of fees –  and limited control over portfolio construction.

Following a review of the portfolio, and working closely with the client, we devised a portfolio management strategy to gradually shift the portfolio from 100% exposure to primary funds to a 50 / 50 model comprising both primary funds and diversified co-investments.  The strategy also shifted the focus away from large DM  buyouts towards the  mid-market and growth equity space, with a meaningful allocation to selected Emerging Markets to take advantage of opportunities in secular growth niches. We achieved the strategy shift by facilitating a number of portfolio secondary transactions.

As a result of a more targeted investment strategy, reduced fee layers and more efficient capital deployment, the outperformance potential of the portfolio was significantly enhanced. By 2017, the client’s private equity exposure had essentially reached the 50 / 50 mix and was experiencing strong annualised outperformance over global public markets, driven particularly by the robust performance of the co-investment allocation.