A new firm launched by one of the co-founders of a leading distressed investment firm and a senior lecturer from Harvard Business School is seeking to bring private equity returns to public market investors through a proprietary investment strategy.
PEO Partners, which launched on Monday, has been managing its flagship fund, the PEO Private Equity Access Master Fund, since May 2021. The fund aims to provide access to returns comparable with traditional private equity funds (net of fees) through public market investing – essentially offering private equity returns to a broader spectrum of investors.
Founded by Jean-Louis Lelogeais, co-founder of SVPGlobal, and Randolph Cohen, senior lecturer in entrepreneurial management at Harvard Business School, the PEO Partners strategy sees it select public equities from the Russell 3000 ‘that mirror the industries that traditional leveraged buyout (LBO) firms invest in and the company characteristics that these LBO firms target,’ according to a statement announcing the launch.
These LBO companies essentially have high profitability, a high payout ratio and low multiples, adds the company. PEO also includes a hedging strategy using S&P put options that is designed to reduce downside volatility and protect capital during market downturns.
‘Private equity is arguably the best-performing asset class,’ says Lelogeais in the company statement. ‘It has delivered better average net returns than public equities with much lower downside.
‘The strategy we have developed can achieve similar performance to median private equity through public market investing and has the significant advantage of being liquid. We are very excited to be first to market in the US and to be able to offer this strategy to a wide range of investors without [private equity’s] traditional high barriers to entry.’
Two key hurdles in private equity are access to deals and liquidity, with investors often locked in for a long time.
Cohen stresses that PEO isn’t looking to replace private equity. Instead, he says that ‘for large institutional investors with established private equity investment programs, our strategy provides an additional portfolio management tool.
‘PEO fills a gap that exists for many investors looking to add private equity-like return exposure to their portfolio. We believe the many use-cases for liquid private equity are so compelling that this nascent asset class has the potential to grow to more than $1 tn in the next 10 years.’
Speaking to Institutional Investor on Monday, Cohen explained that ‘private equity is very smart about picking industries’, with the publication noting that, right now, buyout funds are heavily focused on healthcare, for example. ‘Within each industry, we buy the LBO-able companies,’ said Cohen.
Despite the launch, PEO remains a non-discretionary sub-adviser to Mackenzie Investments’ Private Equity Replication mutual fund, which launched in December 2020 with C$15 mn ($11.9 mn) in assets. Institutional Investor notes that other managers including DSC Quantitative Group and Verda have public vehicles that seek to offer private equity returns from the public markets.
But Lelogeais told the publication that PEO’s hedging strategy appeared to be particularly appealing to investors. ‘We think the timing is pretty good, because a lot of the capital [allocators] we’ve attracted [are] very worried about a crash,’ he said. ‘One of the things they focus on is not just that it’s liquid private equity. They see the hedge we have – it’s very strong.’