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Question: Where will I find my investment return right now? Answer: Alternative Investments. Jeffrey Pike, Senior Vice President Kensington Capital Partners Limited Agenda • Who is this guy? • The Powerful “Alternative” Effect on Asset Mix • Ask Mitt – Why Private Equity Makes Sense • What’s New in the Alternative Aisle? • Questions 1 Kensington: Smart Alternatives • Growing independent Canadian Alternative Investment manager. • Based in Toronto. • Founded in 1996. • Privately held. Private Equity Hedge $ 360 Million Providing institutional and HNW investors with innovative solutions that capture the opportunity in Private Equity including direct private company investments plus exposure to Private Equity funds throughout North America and Europe. Infrastructure $6 Million Providing institutional and HNW investors with select investment strategies through exposure to Canadian Hedge Fund Managers. Comprehensive portfolios are developed to enhance portfolio return and minimize risk. Power Income Fund September 2012 Providing long-term infrastructure investment opportunities with a specialty on power generation facilities throughout North America. Advisory Providing strategic advice and project leadership to corporate, government and financial stakeholders. Sound guidance is provided for acquisitions, divestitures, growth strategies, turnarounds, refinancings and the development of optimal financial structures. 2 The Case for Alternative Assets Stocks Bonds Cash Traditional Asset Classes Financial meltdown as the lesson. Portfolio construction brutally tested. Investors have a risk that the next 3-5 years of deleveraging and recovery will neither be successful nor easy. Will retirement funding be adequate? Will traditional asset mix be satisfactory going forward ? Alternative Asset Classes 1. True Diversification away from conventional equity = Anti TSX. 2. Develop enhanced portfolios - waterproof/bulletproof/shockproof. Private Equity Hedge Infrastructure Real Estate 3. Institutional thinking: long-term return potential. Patience brings returns. 4. Differentiation in product offering / non-commoditized. 5. HNW affluent market plays in this space. Ideal for certain investors. 3 The Powerful Alternative Impact on Asset Mix 1995 2012 2005 Public Stocks Stocks Stocks Private Hedge Bonds Bonds Public Bonds Private Hedge Cash Cash Cash Other Source: Data extracted from “Building a Better Portfolio Around the Traditional Asset Mix” presented at AIMA Canada Luncheon by William W. Moriarty, President & CEO, University of Toronto Asset Management Corp. 4 Institutional Private Equity Allocations • • • Why are institutional investors moving to Private Equity? Moving away from inconsistent public markets. Pro-actively diversifying by looking for consistent return. Institutional Allocations to Private Equity (as a % of total portfolio) $15 Billion $159 Billion Source: Annual Reports. 5 $7.6 Billion $91 Billion $34 Billion $235 Billion Ask Mitt: Private Equity Basics • Significant return opportunity – non-correlated • Manage J-Curve • Buy correctly • • • • • Do not overpay 6-9 months of due diligence Developed investment thesis Exit strategy Steady stream of growth 6 Why Private Companies ? Investors own private companies for the same investment benefit of owning public companies. To enjoy an appreciation in the value of a company as it continues to grow. • • • • Katz Group / Edmonton – 100% Rexall – Pharma Plus 1800 Drugstores $7.0 Billion Revenues • • • • McCain Family / New Brunswick – 100% McCain Foods 51 Global Food Plants $6.5 Billion Revenues • • Thomson Family / Toronto – 85% The Globe and Mail 7 Private Equity Transformation Ambitious Corporation Established Operating Business Give & Go Prepared Foods Corp. Revenue: $97 M Enterprise Value $193 M How to cross the border. Significant growth in SKUs. Solved capacity issues. $25 million of revenue into Wal-Mart. Develop “Frozen Shipped” baking technique. Revenue: $167 M Enterprise Value $325 M Sold to OMERS 4 Year Hold 3.4x Invested Capital 31% IRR 8 60% of Private Equity Sales are from Founders Why Multi-Manager in Private Equity? 42.0% 30.0% 30.0% Diversification Reduces Risk 1.0% Direct investment in single private equity company 0.0% Investment in single private equity fund Manager Risk of total Loss 1.0% Investment in private equity fund of funds Risk of some loss Source: Weidig and Mathonet report, “The Risk Profiles of Private Equity”, January 2004, Nathalie Gresch & Rico von Wyss, Spring 2011. 9 Kensington Portfolio Strategy Private Equity Fund Managers Direct Investments Primary funds from multiple managers create a low risk foundation for the portfolio + deal flow Direct private equity ownership and secondary fund investments drive excess returns for Kensington investors Diversification Alpha Kensington Global Private Equity Fund 2011 Deal Flow 171 investments reviewed 50 Investments full due diligence 5 investments made 10 Private Equity Can Provide Significant Diversification S&P/TSX COMPOSITE INDEX Information Technology 1.2% Telecom Services 5.2% KENSINGTON GLOBAL PRIVATE EQUITY FUND Utilities 2.1% Telecom Services 8.5% Energy 25.3% Other 0.3% Energy 0.5% Materials 9.0% Information Technology 14.7% Industrials 18.4% Financials 31.4% Financials 4.7% Health Care 1.7% Health Care 1.6% Consumer Staples 3.0% Materials 19.6% Consumer Discretionary 4.6% Consumer Staples 6.8% Industrial 6.0% Consumer Discretionary 35.5% 76.3% BIG 3 TSX 14.2% 11.8% BIG 3 KGPEF 68.6% 11 What’s new in the Alternative Aisle ? Private Equity • • • • Multi-manager Liquidity Valuation Transparency Hedge • Think Nimble • Where is the return? • Aggregation combinations Infrastructure • Not a capital gains play • Infrastructure for 20+ years inflation protected income stream 12 Alternatives: 4 Constituent Audiences No longer strange or obscure • Yet not widely held or understood • Current chapter – adaptation and familiarity Provider • Demystify: clarify/explain product/strategy details. • Easy to do business with: correct vehicle, fundSERV, RRSP eligible. • Build Distribution Intermediaries/Distributors • Strengthen your menu board • Think about Private label Advisor • Add to the product tool-box • Economic sharing • Add value to your practice Investor • • • • Portfolio Benefit Absolute return Diversification Meeting funding requirements 13 Questions… Thank you !