Strategies
Private Equity
Asset Class
Private equity consists of investments in privately held businesses across their life cycle, spanning the landscape of venture capital, growth equity, and buyouts.
Venture capital firms pursue minority investments in start-ups from inception to product-market fit. These investors are focused on the quality of the team and the vision for the business. Growth equity firms generally invest in businesses that have proven products but are not yet profitable and are scaling quickly. Buyout firms generally acquire controlling interests in profitable companies and seek to increase earnings through operational improvements and add-on acquisitions.
Portfolio Role
Private equity seeks to outperform public markets, offering high absolute returns with significant upside potential. Investors can seek to reduce risk by investing in a portfolio of investments diversified across strategies, sectors, and vintages.
Our Focus
Given private equity’s strong historical returns and today’s low interest rate environment, there has been growing demand for private equity investments, resulting in increased competition. For buyouts, this can mean rising prices and leverage. Our strategy is to focus on the lower middle market (“LMM”), where there are a greater number of companies and less dry powder chasing deals, which generally means lower purchase prices and less leverage. LMM buyout funds generally acquire smaller businesses, often family owned, and seek to professionalize operations and drive growth, either organically or through acquisitions. If these sponsors are able to achieve their business plan, they may then be able to sell into the more competitive middle market where larger private equity funds may pay a premium for a larger, more diversified business.
Additionally, SCS seeks to partner with buyout firms that differentiate themselves in the more competitive middle market either through sector specialization or through cultural excellence. Our view is that select firms can outperform their peers in the middle market through deep verticalized knowledge and networks. We also believe that a small number of firms are able to differentiate themselves at largest end of the market through cultural excellence built over decades. While these firms may offer less “right tail” optionality than their smaller peers, we believe that partnering with them diversifies our investment program while maintaining our absolute return target.
Venture capital and growth equity are facing a similar rise in competition and prices. Our thesis is that capital is a commodity for the most talented entrepreneurs, and they will generally seek to partner with premier branded firms that offer the strongest networks, signaling, and mentorship. We utilize our reputation, network, and long-term capital base as a competitive advantage to access the firms, and additionally partner with emerging firms that we believe have the ability to grow into future market leaders.
Private Equity Co-investments
Asset Class
Private equity co-investments are direct investments in private companies alongside a fund. Similar to private equity, these investments span the venture capital, growth equity, and buyout lifecycle, but provide more concentrated exposure to a portfolio of businesses. Generally, SCS is offered the ability to co-invest in deals alongside private equity sponsors where the target equity investment exceeds the private equity fund’s concentration limits. SCS serves as a trusted partner to help the sponsor complete the deal, usually at reduced or no fees.
Portfolio Role
Through concentration, co-investments offer higher absolute return potential than private equity fund commitments. Co-investments also generally provide an increased velocity of capital deployment and are offered at reduced fees by private equity managers.
Our Focus
SCS only co-invests alongside our portfolio of private equity sponsors. We maintain strict criteria for co-investing in such opportunities and are particularly focused on alignment of interests in our diligence process to deter adverse selection. We seek to invest in our private equity sponsors’ highest conviction ideas and to generate outsized returns through selection and reduced fees.
Private Credit
Asset Class
Private credit managers originate loans or purchase debt instruments issued by corporations or backed by assets (e.g., real estate) The asset class encompasses a broad range of strategies that are typically either income-focused with an emphasis on downside protection or opportunistic-focused with potential for capital appreciation. The most common type of private credit strategy is direct lending, where an investment manager – not a bank – originates a loan directly to a borrower.
Portfolio Role
Private credit seeks to outperform public fixed income market equivalents with high current yield, low risk of capital loss, and with less correlation to other asset classes. Investors can seek to further mitigate downside risk through diversification of underlying loans across a broad array of borrowers and industries.
Our Focus
Income strategies of focus include direct lending and asset-backed lending and are intended to provide quarterly cash distributions with strong downside protection across market cycles. Within this category, we focus on managers who originate senior secured loans to sponsor-backed middle market borrowers. Private direct lenders have become the primary source of capital to these companies when following the 2008 Global Financial Crisis, regulatory changes caused commercial banks to retreat from the industry.
Opportunistic strategies are intended to provide higher return potential in markets that are less correlated with income strategies and with greater tax efficiency. Investments span a diversified mix that can include corporate distressed for-control, non-performing loans, niche assets with credit-like behavior (e.g., litigation finance), and other special situations.
Private Real Assets
Asset Class
Private real assets are private, direct investments with underlying tangible assets such as real estate, renewable energy, oil & gas, precious metals, timberland, and farmland. Strategies can range from stabilized, income producing “core” assets to ground-up development, capital intensive “opportunistic” investments.
Portfolio Role
Private real assets seek to outperform liquid real assets and generate strong absolute return by exploiting opportunities not available in the public markets. Hard assets also can serve as an inflation hedge as their value may rise with an increase in the Consumer Price Index (CPI) and may offer portfolio protection with a very low correlation to traditional public equity and fixed income assets.
Our Focus
Real estate strategies continue to be a local business with the number of available transactions skewed toward smaller, niche opportunities. Our focus is in higher-upside capital appreciation potential investments through “value add” strategies and opportunistic managers that implement significant capital improvements and physical rehabilitation at the property level. These investments are often less cash-flowing then stable core income opportunities, but feature much higher upside return potential, particularly when partnering with specialist operators that focus on a particular geography or asset type.
Natural resources strategies are a diverse collection of asset classes with various underlying commodities, varying levels of capital intensity, and varying levels of institutional quality management teams across sectors. We are focused on operationally-oriented sector specialists, that seek to purchase assets opportunistically at depressed values and then capitalize on material operational improvements.
Hedged Equity
Asset Class
Hedged equity strategies are hedge funds that implement trading strategies such as longing and shorting stocks with the goal to capture or outperform the public equity market with much less downside risk.
Portfolio Role
Serving as a complement to public equity investments, hedged equity can capitalize on volatility and dispersion of returns within industries to provide a portfolio strong absolute returns with better risk controls versus the public markets.
Our Focus
We believe equity long/short strategies that are specialized with deep sector focus or regional skills are expected to perform meaningfully better than generalists – and most long-only equity managers – when considered on a risk-adjusted basis. Historically such managers have been able to limit downside risk to 50-75% of equity benchmarks, while achieving comparable returns (or better) over the long run. We often seek managers that specialize in sectors such as healthcare / biotech, technology, media and telecom, consumer, Asia / China, as well as certain managers that are the public arm of a large successful private equity group who successfully specialize in various sector verticals.
Absolute Return
Asset Class
Absolute returns strategies are hedge funds that implement trading strategies designed to seek a steady return no matter how the broader public investment markets are performing. These include a diverse mix of strategies such as relative value, market neutral, macro, multi-manager platforms, insurance, and certain quantitative strategies.
Portfolio Role
Serving as a complement to public fixed income investments, absolute return strategies seek to provide low correlations, controlled downside risks, and consistency of returns.
Our Focus
We target a diverse collection of low volatility strategies with deliberate and complementary uncorrelated sources of return. Together, these strategies complement a traditional fixed income allocation and can play an important role in diversifying duration and credit risk. An absolute return strategies portfolio seeks to add value by preserving capital during period of market stress, producing results that are meaningfully better than most areas of the credit markets. Over a full cycle, we believe a collection of these strategies can potentially deliver returns that can average mid-to-high single digits, with a downside risk target for the overall strategy below -10%.