Specialization is changing the profile of private equity. In the past two weeks, one major general partner set up a joint venture with a European financial services specialist, another purchased a commodity specialist, while yet another let it be known that it would be raising a multi-billion dollar energy fund, after shelving a fundraising project for a generalist buyout fund last spring. It’s no accident that the latter’s greatest recent successes have been energy investments.
Palico data shows that some $15 billion was raised for industry-focused strategies in the first six months of 2012 – a record first half for such funds. For the first nine months of the year, five out the ten largest closings were achieved by funds with specialist strategies.
Those figures make it easier to understand why 33 percent of GPs in a recent poll said they plan to adopt more narrowly focused sector strategies going forward.
As GPs and LPs debate fees, alignment of interest, as well as fund structures that give more power to LPs, pledge funds are catching on as an alternative to separate accounts, which tend to be available only to the largest investors.
Pledge funds provide LP opt-outs on GP investments, apply a one-time only management fee, and levy carry, with no preferred return to LPs, though specific compensation levels are far from standardized. Pledge fund structures certainly don’t appeal to all GPs or LPs, but it should come as no surprise that the popularity of pledge funds is rising in tandem with separate accounts.