Boutique PE firms face competitive, consolidation pressures

As capital increasingly flows toward top-performing private equity (PE) firms, industry leaders at a Luxembourg conference predicted a wave of organic consolidation – where scale and track record will determine survival – with mid-market specialists arguing that there is still room for differentiated strategies.

Focus and agility remain important elements for Luxembourg PE firms to retain competitiveness, speakers and attendees said at the Luxembourg Private Equity and Venture Capital Association (LPEA) conference on Thursday.

Competitiveness

Speaking on the “Competitiveness: how top PE firms stay ahead” panel, Sara Huda, global head of investment services at EQT Group, which has €267 billion in assets under management, said her firm has “continued to focus on fundamentals” and not “financial engineering” or “anything other than just driving value at portfolio company level”.

Private equity firms should be “proactive in terms of what our LPs” – meaning limited partners or the institutional investors that place capital into private equity funds – “are is expecting from us,” said Hind El Gaidi, chair of the LPEA and Luxembourg head at ICG, which has €106 billion in assets under management. It is “really important to find your identity as a player and stick to that”.

“At the core of everything we do, we need to deliver good returns,” said London-based Raphael de Botton, senior managing director at Blackstone, which has more than $1 trillion (€859 billion) in assets under management globally. He likened the sector to the restaurant business: “If we don’t serve good food, people are not coming back and you have to do it time and time again.” But in this case, funds serve “good returns” to stakeholders instead of good meals.

“Past success is a good predictor of our future success,” Claudia Scarico, partner at Apollo Global Management, which has about €722 billion in assets under management, told the Luxembourg Times. But firms should not take continued success “for granted”.

Firms in the Grand Duchy need to remain “agile”, Sabrina El Abbadi, Luxembourg country head at Tikehau Capital, which has €51 billion in assets under management globally, said in a video interview. That means “the capacity to adapt the composition of their departments to the market”.

Carmen von Nell-Breuning, senior investment funds adviser at the law firm Clifford Chance, said that firms should “focus on fundamentals […] in combination with continued innovation”.

Adopting AI tools and automation is important to retaining competitiveness, according to Charles Dequaire, managing director Luxembourg at Value & Risk Valuation Services.

Consolidation

Speaking on the market outlook panel, Scarico said she does not expect a huge amount of merger and acquisition activity in the sector. Rather, she expects “organic consolidation, where investors will allocate more money to a few successful companies” and shift away from relative underperformers.

However, Jerome Bertrand, partner at L-GAM, which has around €1 billion in assets under management, reckoned “there is always going to be space for successful mid-market private equity firms” because “we are really focused on” the segment and “we are in fund structures where we cannot just live from the management fees. We live from the success of our investments. We live from the ability to raise the next fund. I think that creates a world of greater alignment.”

A decade from now “we’ll have more assets under management and assets under administration, Claus Mansfeldt, chair and managing director at Swancap Investment Management, which has roughly €5 billion in assets under management, told the Luxembourg Times in a video interview.

“There may be some consolidation, but there’s an opportunity to attract more mid-market firms and more venture capital firms, and we are seeing that is already happening,” Mansfeldt said. He anticipates more investor relations activity will be based out of the Grand Duchy.

“I also applaud the current government for announcing an allocation to alternative investments in the sovereign wealth fund,” with Mansfeldt stating that it was a case of “putting your money where your mouth is”.

Several attendees agreed that smaller firms were more likely to consolidate. Elisa Alonso Sanz, CEO at the data provider Kneip, said “small boutiques” were starting to consolidate.

“The larger players are going to continue to attract much more money than the smaller players and invariably some of the smaller ones will disappear,” said Georg Lasch, head of offshore sales at BNP Paribas. “I would expect the larger ones to be larger, also in physical presence in the country, but some smaller ones disappearing.”

“The Luxembourg market is very much driven by the global markets,” Huda told the Luxembourg Times on the conference floor. “We’re seeing already a start of consolidation of GPs” – meaning general partners or private equity fund managers – “so it’s naturally going to be reflected here in Luxembourg. Is there going to be less GPs in Luxembourg? Probably. But probably not less assets under management. I think you’ll just see a consolidation of bigger firms and less of the smaller players trying to break through.”

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