One of the leading figures in private equity in Europe has proposed that a move away from the standard 10-year lifespan of a private equity fund could be a boost for sustainable finance.
Guy Hands told a webinar hosted by Guernsey Finance, staged as part of Climate Week NYC 2020, that he believed that longer-life funds and long-term investment would grow in popularity.
"I think the investment traditional strategies that mainly focus on going for short-term profits rather than focusing on long-term earnings, particularly when you get interest rates down at these sort of levels, are just wrong," he said.
"If you gave me a choice between investing in a private equity fund which said we can get you 15% returns and our average life is five years, or something where I can get 8% returns with an average life of 25 years, I prefer the 8% over 25 years, because I think that ability to reinvest at 15% is far less, and the costs of doing it are far more. But I think that's a difficult thing to get out there."
More patient capital in private equity is seen as an opportunity to back more sustainable finance projects and the likes of life sciences.
"If you actually look at the returns, you make a lot more money if you can find a good business which has been proved over so many years, which will adapt for where society is going over the long term."
Mr Hands, Chairman of Terra Firma Capital Partners and a Guernsey resident for more than a decade, said that one of his most successful investments had been in forestry. "The returns are minute per year, but over the very long term, forests have done unbelievably well."
"If you gave me a choice between investing in a private
equity fund which said we can get you 15% returns and our average
life is five years, or something where I can get 8% returns with an
average life of 25 years, I prefer the 8% over 25 years, because I
think that ability to reinvest at 15% is far less, and the costs of
doing it are far more. But I think that's a difficult thing to
get out there."
Guy Hands, Chairman, Terra Firma Capital Partners
Mr Hands has already spoken out this year, during the Covid-19 lockdown, on the need to build a better world. He said in the webinar that he had "always been a passionate believer that man is producing climate change" and the diverse range of business investments that Terra Firma has, or has held in the past, from green and sustainable projects to garden centres and McDonald's restaurants, had been affected by weather-related issues.
"We owe it to our children and their children to start making some really passionate moves, and I get upset by the fact that we are spending trillions on Covid, and if we spent a similar sort of money on trying to find some real positive solutions to how the world can develop, but at the same time not destroy itself, we would make enormous progress.
"Today's agenda is much more about a balanced world. It's about sustainability. It's about being willing to give up economic growth for a better environment. And if the big companies miss that trend, my personal view is they won't succeed for very long."
Dr Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance, and the Chairman of the industry steering group Guernsey Green Finance, said that the jurisdiction was already looking at rethinking the private equity model.
"Guy's suggestion is totally aligned with our thinking in Guernsey, and we will be looking to raise this prospect with the managers of Guernsey Green Funds," he said.
Mr Hands was speaking alongside Gillian Tett, Editor-at-Large, US, at the Financial Times; Anastasia Amaroso, Executive Director and Head of Investment Strategy at JP Morgan Private Bank, New York; Tim Hames, former Director-General at the BVCA; and Dr Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance. The seminar was an official event of Climate Week NYC 2020. You can watch the whole event back on demand here.
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