Peter Rip posted an interesting analysis of an emerging alternative asset model – the platform strategy, whereby a single firm offers LPs exposure to a full range of public and private equity asset classes – early, mid, late, PIPE, LBO, public, etc.
While it is an undeniable fact that platform strategies are on the rise – Carlyle, Pequot Capital, Farallon, etc – I am not a believer in the approach.
1) conglomerates are a discredited concept
a. history suggests that conglomerates do not in fact allocate capital more efficiently than capital markets
b. platform strategies leverage the very same arguments that conglomerates once did to justify their existence
c. investors perform better when they create return/risk appropriate portfolios than when they outsource portfolio construction to a conglomerate
2) platform strategies create an adverse selection problem
a. the best LPs will want pure play exposure to asset class segments and risk profiles
b. LPs who see value in abdicating portfolio selection are probably not the best nor brightest
3) Platform strategies create GP/LP alignment problems
a. While the accumulation of assets and the leverage of LP relationships across strategies clearly lines the pockets of the firm’s principals, it is unclear that larger, diversified funds lead to better risk/adjusted returns
b. Strategy drift in chase of larger platforms may negate the value in sustained focus and pure play execution in an area of one’s true competence
4) Incentives and management
a. How do you pay people for collaboration across strategies – how do you create systematic flow of information?
b. How do investors, typically not by nature great managers, manage the complexity of multiple markets, geographies, risk profiles, competencies…
5) Who has a bigger d*ck problems
a. Some strategies scale more than others
b. How do you avoid smaller strategies partners being marginalized by the larger strategy partners – see Apax early stage experience
6) Focus and decision making
a. Sourcing deals, syndication partners, service provider partners, terms, competition, etc all change as you move along the risk spectrum
b. The lack of common ground makes investing in ecosystem partners, deciding where and why to invest, and having your “partners” add value to your decision making process a real challenge
My own view is that the best LPs will prefer boutiques and will seek to build return maximizing portfolios across pure-play exposures to risk - this clearly is inverse to investors building platform companies predicated on LPs outsourcing their risk allocation to groups that will build that basket for them.