Timothy Geithner’s new private equity fund will appreciate the former treasury secretary as much for his government connections as for his financial acumen.
Warburg Pincus said last week Geithner will come aboard as president, joining a long list of former government officials who have entered the private equity space, including former Treasury Secretaries John W. Snow and James Baker III, former Vice President Dan Quayle and ex-CIA chief David Petraeus. Geithner can use his connections and credibility to help the firm bring in fresh capital and find new investments, according to Scott Clemons, chief investment strategist for the wealth management division of New York-based Brown Brothers Harriman, America’s oldest private bank.
“What it tells me, is that successful investing in private equity is largely about networks, and men and women who have served in public offices have Rolodexes with lots of international area codes in them,” he said. “An information edge often comes from knowing the right phone number to dial.”
Private equity firms pool the assets of pension funds and high-net-worth investors to buy pieces of closely held companies that later can be sold for a hefty profit. The industry started with just a half dozen big players in the 1980s, and now includes hundreds of firms that manage $1 billion or more in assets. Some of the most well known include the Blackstone Group, Kohlberg Kravis Roberts, Cerberus Capital Management and Carlyle Group.
Brown Brothers Harriman manages $22 billion for its high-net-worth clients, offering them in-house private equity funds as well as outside PE funds as part of its “agnostic” approach to investing, Clemons said.
Private equity investors should be prepared to invest $1 million over a period of years that could be tied up for a decade, he said, and then expect a substantial “illiquidity premium.” During the 20-year period ending in 2012, private equity investors realized average returns of 13.4 percent vs. 8.2 percent for the S&P 500, according to a BBH report.
BBH’s private equity funds are in small domestic companies with about $25 million to $100 million of revenue. But the firm is taking a hard look at emerging markets such as China, he said. To find those companies, BBH will partner with local private equity managers who have deep insight into their markets.
“There is quite a bit of entrepreneurialism along the gold coast of China from Beijing down to Shanghai,” he said. “These are smaller companies involved in technology and manufacturing and focused on export markets. Those markets are where the U.S. was in the 1970s.”
Clemons said successful PE investing requires managers to locate inefficient markets and find “100 cents of value by investing only 60 cents of equity.”
One growing trend is that private equity funds will specialize in specific sectors, such as energy infrastructure, he said.
“Private equity funds are being built to play the shale gas phenomenon,” he said. “We are also seeing a lot in technology and some infrastructure such as roads and rail.”
