Lynn Fordham looks beyond SVG's turbulent past

Having spent the late 1980s working in some of the toughest corners of Africa, Lynn Fordham knows how to cope with periods of instability and volatility.

The chief executive of SVG Capital was posted to far-flung countries including Cameroon, Zaire and even the Ivory Coast, as an executive for Mobil, the US oil company, where she quickly learnt to deal in difficult environments.

Three decades on - and after being re-elected as SVG's head this month - Mrs Fordham has a steely message regarding the London-based firm's crisis history.

"We will not," she says, "be going back where we were."

In 2008's financial crisis, SVG imploded. As the value of its investments fell, the use of debt to finance fund stakes caught up with it.

"There was too much leverage for that cycle and not enough diversification," Mrs Fordham recounts.

SVG launched a rights issue, and brought her in as its chief. In 2012, it said it would spread its portfolio over many more firms, and return excess capital to shareholders alongside making these new investments.

The firm's business involves committing capital to the long-lived funds raised by private equity firms for buyouts, sometimes directly investing with them in companies.

Crucially, it gives mainstream investment managers on its shareholder register liquid access to an asset class otherwise off limits to them.

Historically SVG was also a proxy for Permira, one of Europe's biggest buyout firms, in which it was the biggest investor.

The firm has since returned more capital to shareholders than the size of its market capitalisation when it said it would change strategy - over £500m.

It has committed a similar amount to renewing its portfolio, one quarter of which dates after 2012.

The listed private equity model still attracts scepticism from the industry over its leveraged past, despite rising interest in sources of "permanent capital" for the industry.

"I don't think that our record from the crisis would indicate that [this model] is a busted flush," Mrs Fordham says. SVG's market value is now nearly £1bn.

One shareholder, Coller Capital, which owns nearly a quarter, remains dissatisfied with capital returns. Nearly a third of the shareholder votes cast were against Mrs Fordham's re-election this month.

As well as setting out what SVG is looking for in new private equity fund managers as it brings its relationship with Permira's pre-crisis funds to a conclusion, Mrs Fordham also strongly defends the over £200m of cash currently on SVG's balance sheet.

Investors in listed private equity often dislike the "cash drag" of the money kept on side while underlying funds look for deals.

"I would caution that we tend to overrate the sexy end of this: what are you investing in, whom are you investing in. There is a massive counterbalance, which is the financing," Mrs Fordham says.

Calculating the right capital allocation, she adds, is just as important as the investment strategy. SVG's net debt in the 2008 crisis was 71 per cent of shareholders' funds. Now it is net cash.

Keeping cash on hand to invest when the right manager starts raising money, after heavy due diligence by SVG, is crucial. "That's the nice thing about private equity - you can look quite far in advance at funds that you might be getting into," she says. "We're quite close to managers, so we've got a pretty good idea of when they're going to come back to market."

Private equity can be a dauntingly long-term bet. According to Palico, a data provider, the median fund's lifespan in 2014 was a record 13.2 years, versus 11.5 in 2008.

The turnround in Permira's 2006 vintage fund - which has driven SVG's recent performance and the cash flowing into its coffers - is a case in point.

The buyout group has used the buoyant equity markets this year to sell or list its last big pre-crisis bets, including Hugo Boss and Iglo Foods.

"We've all benefited from general market beta" - or the overall rise in stock valuations - for resurrecting investments and selling them at good prices, Mrs Fordham says.

"But we as investors would not be comfortable assuming that this will continue."

This is reflected in its diversification. While investing in Permira's latest buyout fund and working with Cinven, a large firm, SVG is also gearing its investments to managers such as Clayton Dubilier & Rice and FFL. All of these are noted for their ability to make operational improvements at companies whatever the state of the economic cycle.

"If you spot a trend in our investing to date, it is this," says Mrs Fordham. "At some point this cycle is going to tip - and you're not going to be able to hide behind market beta or quantitative-easing beta."

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