A concise fortnightly distillation of key private equity news, with links to noteworthy PE articles and studies, edited by Palico – The Online Marketplace for Private Equity LPs, GPs and Advisers
WHY BLOOMBERG REPORTED THAT ONE IN FOUR PRIVATE EQUITY FIRMS MAY STARVE: Bloomberg reported in a high profile story two weeks ago that poor returns from boom-year vintages means the end of the road for as much as a quarter of today’s active general partners. A two-minute Bloomberg Businessweek video details the poor performance behind the potential shakeout. Meanwhile, Palico data shows why the number of GPs may actually grow, even as fund managers permanently shut operations.
MID-SIZED GENERAL PARTNERS FACE A GROWING FUNDRAISING SQUEEZE IN EMERGING MARKETS, according to the Emerging Markets Private Equity Association. Emerging markets accounted for a record 20 percent of global fundraising in 2012, but according to this study promising mid-sized funds are getting ignored by overstretched investors, who cut down on costly research by going for large brand names. “Average fund sizes have more than doubled in the last three years, while the total number of funds holding closes has declined – 96 emerging market funds held final closes on an average fund size of $192 million in 2009, versus 84 funds closing on an average of $419 million in 2011,” says the EMPEA. The growing struggle for funding among mid-sized general partners in emerging markets should, in theory, provide some great opportunities for investors.
ALTERNATIVES EXPOSURE IS LINKED TO LARGE PENSION FUNDS BEATING SMALLER FUNDS, AS LONDON CONSIDERS CONSOLIDATION. A study of 1,570 U.S. pension funds by Wilshire Associates shows that large plans with assets under management exceeding $1 billion and mega plans with more than $5 billion in AUM, outperformed smaller funds over one-year and ten-year periods. Notably, the median small plan had zero exposure to alternatives like private equity, while the median large and mega plans had between 9 and 10 percent of AUM in alternatives. Wilshire’s study provides ammunition for Edmund Truell, the new head of the London Pensions Fund Authority. Truell tells the Financial Times that he would like to pool London’s 32 separate borough plans into one plan with assets of about £40 billion. Truell aims “to gain economies of scale” and “improve returns”, the FT writes.
THREE SENIOR DEALMAKERS ARE “ADOPTING A DEAL-BY-DEAL MODEL THAT MANY ARE INCREASINGLY TURNING TO”, writes the Financial Times’ Anne-Sylvaine Chassany. “Philippe Robert, who covered French deals at Permira, and Martin Clarke who led the consumer team, have joined forces with ex-Blackstone partner Michael Dugan to start OceanBridge,” a buyout fund “that will tap a handful of sovereign wealth funds and high net worth individuals for every deal they find”. Classic fund structures have “big advantages” when it comes to “fees and committed capital”, says Robert. But they include “rigidities” that don’t exist in deal-by-deal structures, notably a “reliance on fundraising cycles, prompting buyout groups to sell assets because they need to market a new fund, or to buy assets for the sake of deploying capital before the expiration of their fund’s investment period”. The story implies that new GP teams, made up of partners with good records, will increasingly reject classic fundraising for deal-by-deal formats.
THE MOMENTUM FOR RETAIL PE FUND DISTRIBUTION GATHERS STEAM. Reuters reports that retail investment fund giant Aberdeen Asset Management is buying 50.1 percent of listed private equity fund-of-fund operator SVG Advisers for £17.5 million, boosting Aberdeen’s PE assets under management five-fold to £5 billion. SVGA CEO Lynn Fordham says “we give the private equity expertise and Aberdeen bring the distribution”. The deal comes in a tough fundraising market where many of PE’s traditional institutional investors remain at or above target allocations to the asset class, and after news last summer that private equity mega general partner, KKR & Co, would start marketing a limited number of private equity funds to retail investors. Also, in a conference call monitored by Reuters, David Rubenstein, Co-CEO of Carlyle, another mega firm, says that money in tax-deferred U.S. personal retirement accounts, known as 401ks, “could flow into alternative assets in the next two to four years”.
OAKTREE FOUNDER HOWARD MARKS ON WHY HIS HURDLE RATES WILL STAY AT 8 PERCENT: Marks, founder of NASDAQ-listed Oaktree Capital Group, one of private equity’s biggest debt specialists, says in the firm’s Q4 2012 conference call that in the current low-yield world “an intellectual case” can be made for why fund managers should take a share of investor profits once portfolios reach an annual return of 6 percent. Yet he still undercuts peers who suggest hurdle rates should ratchet down from the 8 percent industry standard. Marks explains: “I don’t want to go to my clients with an academic argument” for “why 8 percent is too high” when “I still think we can clear that hurdle consistently”. In the call, Oaktree says it expects to target new investors in the future - notably high net worth individuals - in addition to its traditional institutional investor base. In Q4 2012, Oaktree reported that adjusted net income increased 187 percent over the same period in 2011, to $220.4 million, with much of the gain driven by carried interest.
OMERS POSTS A 10 PERCENT ANNUAL RETURN, DRIVEN BY ALTERNATIVES. During its annual results press conference, the Ontario Municipal Employees Retirement System, an often emulated bellwether for large pension funds, reported a 10 percent return for 2012, “with private equity and real estate more than making up for losses in the oil and gas sector”, notes Canadian newspaper The Globe and Mail. Returns at the $61 billion in assets-under-management fund were led by the private equity portfolio, which posted a 19.2 percent gain for the year. OMERS is currently increasing its alternative investments exposure to 47 percent of AUM, from 40 percent at the end of last year and 18 percent nine years ago. But the bulk of the increase is not likely to be managed by outside general partners, as OMERS pushes directly managed funds to 95 percent of AUM, from a current figure of 88 percent.
PRIVATE EQUITY INDICATORS ARE IMPROVING IN THE KEY U.S. MARKET, shows the Private Equity Growth Capital Council’s Private Equity Index. In Q4 2012, the index rose to its highest level since Q3 2008 on “increases in private equity investment, fundraising and exit volumes”.
“THE LAST QUARTER OF 2012 WAS “A ROBUST TIME FOR EXITS”, notes William Chu, one of Zurich Alternative Asset Management’s senior executives, in this Privcap video that takes a look at private equity performance in 2012 and beyond. In a panel discussion, Michael Elio, head of Industry Affairs at the Institutional Limited Partners Association observes that the rising share of secondary buyouts is “an area of great concern” for investors, while Andrea Auerbach, head of private investment research at Cambridge Associates, says that record fundraising vintage years 2006 and 2007 “have been through the depths and come out the otherside.” Chu concludes with a prediction and a caveat: There will be “a wall of distributions in 2013” – “knock on wood”.
KNOW SOMEONE TRYING TO BREAK INTO PRIVATE EQUITY? They might want to read about “one of the most popular topics at the Columbia Business School Private Equity & Venture Capital Conference” this year. It “didn’t concern LBOs or Dell’s $24.4 billion take-private”, writes Luisa Beltran of PEHub. It was all about how to get a job at a private equity firm - a particularly idiosyncratic process.
FOR A HANDY COMPENDIUM OF GLOBAL, REGIONAL & SECTORAL PE STATISTICS FROM 2012 AND EARLIER, plus a gatekeeper’s view of where opportunity will be this year, checkout Torrey Cove Capital Partners’ 2013 Private Equity Market Outlook.