Eric Halverson, Founding Partner of Qualitas Funds, took part in the panel “Institutional Allocator Priorities: Portfolio Construction & Pacing”, which focused on how large LPs are sizing their commitments, evaluating managers and managing portfolio risk.
Eric shared the stage with Phil Greenberg, Vice President, Investments at US Steel and Carnegie Pension Fund; Wadih Manneh, Head of Private Markets at Arab Bank (Switzerland) Ltd; and Christian López-Baillo, Senior Head of Unit – Institutional Mandate Relationship Iberia at the European Investment Fund (EIF), in a discussion moderated by Mar Jiménez, Portfolio Advisory & Asset Allocation at DiverInvest.
The starting point was a backdrop of high financing costs, valuation uncertainty and slower exits that are delaying distributions. In this environment, the panellists agreed, portfolio construction and liquidity management have taken on greater importance. On top of this, companies now remain in private hands for much longer, meaning that much of their growth is generated outside public markets. Speaking for the EIF, López-Baillo also highlighted the lack of long-term capital to scale up European technology companies and the role of initiatives such as the European Tech Champions Initiative.
Against this backdrop, Eric described the paradox facing the industry: “There has been a very rapid inflow of capital, but that same inflow erodes private equity returns.” The asset class’s excess return over public markets, which was very clear before 2008, has gradually diminished since then. However, the Founding Partner of Qualitas Funds explained, that capital has not been distributed evenly. It has been concentrated in mid-sized and large funds, while the lower-middle market continues to deliver 200 to 400 basis points more in returns than larger funds.
The same logic shapes his view on the arrival of retail investors, driven largely by the big asset managers. Eric argued that, for Qualitas Funds, the democratisation of private equity is a positive development and need not be the exclusive preserve of high-net-worth individuals, provided that investors receive, in exchange for illiquidity, a return that is genuinely higher than that of public markets. The rest of the panel echoed this caveat, stressing the importance of fully understanding the vehicles and structures in which professional investors and small savers place their trust.
Discipline as a competitive advantage
The lack of distributions steered the discussion towards secondaries, which Eric Halverson regards as a structural tool of private equity rather than a cyclical response. Although the scarcity of liquidity has accelerated the rise of these vehicles, turning an illiquid asset into a liquid one is, in his view, a natural evolution that benefits both buyers and sellers. Drawing on Qualitas Funds’ experience in this strategy, Eric also noted that selecting opportunities is not just about the discount, since the quality of the management team and the duration of the investment matter just as much, if not more.
In a market where value creation increasingly depends on operational improvements, Eric believes multiple expansion remains a reality in the lower-middle market. While entry multiples in large European deals have risen from around 12x to 16x EBITDA over the past decade, in deals below €100 million they have remained stable at around 8x. “This allows lower-middle market funds to buy at 8x EBITDA and consistently sell with multiple expansion,” he noted.
That discipline also extends to manager selection, where Qualitas Funds analyses around 40 factors drawn from thousands of meetings and manager data. One of the biggest risks is a team breakup. To illustrate this, Eric Halverson used an analogy: “A partnership is a lot like a marriage, and we see two extremes that can lead to a breakup. At one end, the partners argue about everything. We’ve been in meetings where you ask about the entry multiple on a deal, one of them gives a figure and the other immediately corrects him. At the other end are partners who never argue, who seem to agree on everything because they’re afraid of conflict. But people are different. We want to see different perspectives, partners who clash a little and are able to reach an agreement and move forward.”
Asked at the close of the panel which segment he would increase exposure to, Eric did not hesitate to name the lower-middle market as the most attractive part of the market. This conviction sums up Qualitas Funds’ view in a more demanding cycle, in which specialisation, investment discipline and the right selection of managers and market segments will be decisive in continuing to generate long-term value.