Chris Yang is a Managing Partner of Grove Street Advisors, a private equity investment firm focused exclusively on customized separate accounts, and will be joining iGlobal as a speaker for the Alternative Private Equity Structures event. Grove Street currently manages $4.8 billion for its 11 clients with a particular focus on accessing the most promising lower middle-market buyout, growth equity and venture capital funds. Mr. Yang is an active investor in micro and mid-market buyouts with a particular interest in distressed opportunities, as well as technology-oriented growth and venture funds. He takes leadership responsibility for Grove Street’s strategy and portfolio development in China, and is also involved in the firm’s secondary fund investing activities. Mr. Yang is a member of a number of fund advisory boards representing LP interests.
Q: How do separate accounts assist in LP asset allocation and risk reduction?
A: The benefits of a separate account are most apparent in a truly customized vehicle versus a separate account in name only. We often hear about peers in our industry re-packaging a slice of various comingled fund-of-fund options into a so-called separate account vehicle, essentially inhibiting most customizations and the flexibility of a “true” separate account. Grove Street structures each mandate with independent investment guidelines that are complementary to the client’s other PE activities. We incorporate the flexibility for clients to change the commitment size, investment pace, asset allocation or even veto certain investments. Through regular and ongoing discussions about the pipeline of investment opportunities, we can also avoid any overlap with the client’s core PE program or transfer relationships to the client if they are interested and the fund is receptive to a direct investment. The achieved asset allocation flexibility of a true separate account can help diversify the risk of a PE program. The separate account structure also provides additional transparency into the fund portfolio and even the underlying portfolio companies for LPs to better assess their portfolio composition and risk exposure.
Q: What are the different benefits generated for LPs and GPs from these separate accounts in the PE Portfolio?
A: In a true separate account, the LP gains tremendous flexibility in an otherwise liquidity constrained asset class that has historically had the tendency to be opaque. Adjustments to the commitment size, investment pace or asset allocation can be made during the investment period. LPs can get more visibility about their specific asset allocation and the pipeline of investment options. LPs can discuss concerns about certain investments with the GP or veto funds that don’t fit their overall vision. Because of the specific investment guidelines of each account, the GP can be more precise in selecting funds that best meet the individual client’s investment needs and hence may increase performance and client retention. A separate account specialist can also invest in smaller funds, as not every fund has to be placed in every account.
Q: What challenges do LPs face from separate accounts that do not affect GPs in the same way?
We strongly believe in the advantages of separate accounts for larger investors. However, a small investor might not meet the minimum account size required for a properly diversified separate account. While separate accounts are typically priced competitively when compared to comingled structures, there are certain small fixed costs, such as legal and auditing, that are not shared with other investors as they would be in a comingled fund-of-fund. Our clients typically work closely with Grove Street as we offer a variety of services beyond simply making the best investment decisions for the portfolio. This level of interaction requires a certain organizational commitment on the part of our clients, as well as scale of overall investment activity.
Q: Can smaller investors participate in alternative private equity structures in the current model? What are the best options?
The separate account minimum for proper diversification across time, geography and strategy is about $35 million of commitments p.a. for 3 years at the level of customized services Grove Street Advisors offers. For clients with smaller PE investment needs a comingled fund of fund might be a more efficient option.