“We are in the business of providing access to what we like to think, are best in class leveraged buyout [funds] in Western Europe and North America,” said , chair of Swancap Luxembourg and chair of the Luxembourg Private Equity and Venture Capital Association (LPEA) during an interview in August 2024.

The “Swan” in Swancap, an investment boutique with €4bn in assets under management, stands for Sleeping Well At Night. The interview with Paperjam makes us believe that a black swan event poses limited risk in derailing its performance trajectory, given the firm’s emphasis on diversification.

Buyout funds: outperforming public markets

Mansfeldt explained that Swancap is a fund of funds manager covering a large spectrum of buyout funds that include mid- and large-cap companies. “[We use] three different routes--primaries, secondaries and co-investments--to get to the underlying buyouts.”

He argued that the median historical return of buyout funds over the long run (30 to 40 years) has been between 12% to 13%, net to investors, whereas the S&P 500 performance on “a private market equivalent basis” has been 6% to 7%, annually. He thinks that this outperformance explains why investors are ready to accept the lack of liquidity.

Earlier this year, Paperjam on the on private asset investments by Norges Bank Investment Management. Paperjam concludes that Swancap has elected one of the sweet spots in the alternative private investments space, as NBIM found that leveraged buyout funds “outperformed public equities, on average, by 3% to 4%,” whereas venture capital and growth equity funds “have underperformed by 1% to 2%,” on average. The study reviewed funds with vintage years from 1985 to 2016 with performance data up to 2Q23.

On the other hand, Mansfeldt admitted that the dispersion around the median performance for private equity is “much, much wider” than for mutual funds investing in public companies. The latter tend to maintain a portfolio very close to their benchmark. In the bottom quartiles of a buyout fund universe, “you could have funds that are going to potentially lose a little bit of money or not return much.”

Paperjam reported similar observations made by NBIM. Indeed, the differences in the performance between the top and bottom quartiles were as high as 12.1% for buyout funds. Consequently, Mansfeldt thinks that gives Swancap “a very strong raison d’être to assist people navigating this space.”

Underlying current

Mansfeldt believes that “this recurring phenomenon” on performance is possible on the back of “control investing.” As for every deal in M&A transactions, an extensive due diligence is performed by the general partner and the banks providing debt financing. He thinks that inside information provides a comparative advantage to private investors over investors active in public equities.

Yet he assessed that the “most powerful” element for the on-going performance is “probably” the alignment of interest. “The boardroom is inhabited by one shareholder and the management is given incentives which are completely aligned with the agenda of that shareholder,” stated Mansfeldt.

Investing in the best buyouts is marred with obstacles

Swancap claimed to have achieved a 20% annual return on €7bn of cumulative investments in almost 24 years. The firm spun out from Unicredit, an Italian bank, in 2013. Mansfeldt explained that Swancap aims at selecting the funds that will do better than average and avoid funds that “display some characteristics that that in our experience have indicated a higher risk of not doing so well.”

“We provide solutions so that investors can get a good and balanced exposure to the best in class or top tier in the game… but there are hurdles for getting in,” he said. Beyond the extensive effort and the use of analytics to select funds, he commented that performing funds “are quite full” when raising money as investors such as Swancap tend to allocate at least the same amount upon redemption. This is especially true in Europe, where investors in many countries such as Germany and Italy have been “a bit behind” compared to their peers.

Mansfeldt noted that large European insurers are having less than 4% allocated to PE against more than 20% for Calpers in California or large Canadian pension funds. Given the long-term profile of their liabilities, he thinks that insurers and pension funds should both reap the “long duration dividend.”

Given that the minimum ticket size runs between $5m and $10m, PE products have been the reserve of institutional investors, large family offices or the “super wealthy.” He thinks that Swancap helps provide greater access but is not yet a retailisation of the products for individual investors or smaller pension funds which do not have a 10 year-plus relationship with primary funds. Yet with a minimum commitment of $1.5m, spread evenly over four years, it is hardly accessible for entities with less than around $10m in total assets to ensure proper diversification with other liquid asset classes.

Given the high diversification and the defensive nature of Swancap’s products, Mansfeldt thinks that they suit a “wider distribution” but noted that regulatory administrative costs of running a retail product “are not efficient yet.” Swancap is still not far from that goal as it operates partnerships with private banks and independent feeders, which creates pool of clients that are therefore considered as a single counterparty for Swancap. Yet Mansfeldt admitted that the minimum commitment still runs at $150,000.