The Faculty Spotlight with: Neil Harper, Managing Director, Morgan Stanley AIP

In anticipation of the forthcoming Capital Creation meeting in Monte Carlo this September, we met with Neil Harper, Managing Director at Morgan Stanley AIP, to hear his thoughts on how the private equity market is developing through 2010 as well as the growing trend towards transparency.

“The large amount of dry powder in the market is a clear indication that some segments of the private equity landscape are still challenged, and likely to be so for some time,” asserts Neil. “That said, we are seeing some extremely interesting opportunities in the lower and mid-market buyout space and distressed markets”. According to Neil, it appears that through the crisis will now come opportunity. “We also think the secondaries market will prove very interesting over the coming months since, from a structural point of view, it will be increasingly utilised as a portfolio management tool. Not only that, but investors will increasingly be looking to exit at what they perceive as better than distressed prices as the environment improves and becomes more stable”.

So what will be the lasting impact of the financial crisis on private equity? For Neil, a number of funds will find it difficult to raise capital in the near- to mid-term. “Fundraising has obviously suffered, with a number of GPs deferring fundraising campaigns and this trend will continue for the next few years. As a result, they now need something distinctive to attract investment”. According to Neil, LPs will indeed remain in private equity for the long-term, but they are now reacting to the downturn by increasingly scrutinising those firms with whom they invest. “There has been a clear push for transparency”. Neil continues, “LPs are now looking for a closer dialogue with GPs, especially with regards management fees and other costs associated with private equity investment. They expect a far more transparent channel of communication in order to understand the nature of costs and, increasingly, to gain assurances over the stability of the fund team. Also more and more funds are now required to have “divorce clauses” whether “for fault” or “no fault” inserted into agreements, ensuring greater protection for the investor in this uncertain environment”.

The introduction of the ILPA (Institutional Limited Partnership Association) principles has furthered the cause of LPs’ quest for greater transparency, but is there a point at which we need to draw the line on transparency? Is there a risk that we might become overly-transparent? “That’s unlikely to be the case”, argues Neil. “Most LPs have large, diversified portfolios and therefore there will naturally be a limit to the amount of information they desire. Besides, the idea is not to create a new, more onerous task here; all the information is already there – it just needs to be shared in a far more communicative, collaborative environment”.

Transparency in private equity will form one of the key discussion points at September’s Capital Creation meeting, where Neil believes the attendees will have the opportunity to drive this new, collaborative environment in private equity. “It will bring together a targeted community of mostly mid-lower market players which is different to other meetings on the calendar. It therefore will be a very useful way to catch up with industry peers and have meetings with managers with whom we may partner in the future”.

Neil Harperwill be putting forward his thoughts as a key panellist at Capital Creation 2010. To find out how you can join Neil in Monte Carlo, or to simply to find out more information about this year’s meeting, please telephone +44 (0) 20 7368 9465