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
THE U.S. AD BAN IS LIFTED, BUT DON’T “EXPECT THE AIRWAVES TO BE FILLED WITH ADS” on private equity funds, writes New York Times DealBook legal reporter, Peter Lattman, announcing the Securities and Exchange Commission’s canceling of the general solicitation ban for private placements. The SEC’s new rule states that general partners must still “have a reasonable basis to conclude that an investor is qualified” before engaging with them “and includes various verification methods, including reviewing tax returns.” PE funds using advertising also must “notify the S.E.C. 15 days before the solicitation begins.” It’s early days, yet those requirements may prove cumbersome. In the U.S., “only 7.6 million households” are qualified for private placement investing, so “mass advertising through television or magazines makes little economic sense for most funds.” Investors eligible to invest in PE funds “must have a net worth of at least $1 million, excluding their primary residence, or annual income of more than $200,000 in each of the previous two years.”
IN THE U.S., INSURERS MAY SOON TAKE OVER THE PUBLIC PENSION PLANS that serve as key suppliers of capital to the world’s private equity funds. The New York Times DealBook reports that legislation sponsored by Orrin Hatch, senior Republican on the Senate Finance Committee, would permit states and cities to voluntarily transfer responsibility and potential liability for defined benefit plans to insurers. Hatch “has devised a way for states and cities to exit the pension business while still giving public workers the type of benefits they want.” Big insurers “like MetLife and Prudential might thus step into shoes now occupied by the likes of CalPERS. Life insurers would bear the investment risk, shielding both retirees and taxpayers.” As operators of pension funds, PE would likely remain a popular form of investment for insurers, precisely because the asset class’ high expected returns relative to other investments are a promising way to meet liabilities, despite insurers’ need to set aside prudential reserves.
APOLLO MAYBE ONE OF JUST A FEW PE FIRMS “ABLE TO GATHER A LARGER FUND than it did before the financial crisis,” writes Bloomberg’s Cristina Alesci and Devin Banerjee. “Apollo Global Management completed the first stage of capital raising for its newest flagship buyout fund with about $6.8 billion and has set a maximum target “of $15 billion.” Apollo’s last flagship fund raised $14.7 billion in 2008, the year Lehman Brothers collapsed and the financial crisis began. Alesci and Banerjee note, “fewer buyout firms are raising a larger share of capital as the industry consolidates, and investors, seeking to cut costs, allocate their money to a smaller group of managers.”
“ASIAN PRIVATE EQUITY FUNDRAISING IS IN THE DOLDRUMS,” reports The Wall Street Journal, citing data compiled by sister company LP Source. Asian fundraising “reached only $15 billion in the first half of 2012,” versus $53 billion raised in full year 2012 and $64 billion raised in all of 2011. This is in contrast to the U.S. and Europe where, according to a range of data providers, fundraising was higher in the first half versus the same period last year. “Weighing on investor appetite are worries about the economic slowdown in China,” by far Asia’s biggest private equity market. The common theme to fundraising in Asia, the U.S. and Europe: resource-stretched limited partners are committing more money to fewer managers and often overlooking smaller, harder-to-research firms. The Journal points out that “the number of new funds with less than $1 billion in Asia dropped to 48 last year, compared with 78 in 2011 and 90 in 2010.”
IN MENA, SMALL AND MID-SIZED COMPANIES ARE THE PLACE TO BE, POST-MORSI, implies GrowthGate Capital partner Karim Souaid, in a Financial Times opinion piece published the day Egypt’s president, Mohamed Morsi, was deposed. In the Middle East and North Africa, “small and medium-sized businesses – defined as having a market value of between $25m and $250m – account for more than 90 percent of all companies.” They have low debt and are “ignored by commercial banks,” creating “an opportunity for private equity to inject capital.” Meanwhile, in a Fortune magazine Q&A, Leslie Jump, a Washington, DC-based partner in Egyptian venture capital firm Sawari Ventures, says Morsi’s deposition “is really a continuation, and hopefully a conclusion” to the revolution of 2011 when Egyptians “thought they were moving toward a more open government and a more open economy.” Egyptian startups “could flourish” with “a modicum of rule of law” and “respect for intellectual property,” she says. For details of Egypt’s macro challenges, FT Data offers “The Egyptian Economy in 10 Charts.”
PE MAYBE BETTER SUITED FOR AFRICAN INVESTMENTS THAN STOCKS, imply two articles, one from the Financial Times and one from Bloomberg. “Institutional investors that aim to play Africa’s domestic growth story by buying into the continent’s equity markets are missing a trick,” writes the FT. In the article, Rory Ord, a consultant at Cape Town-based consultancy RisCura Fundamentals, argues that listed African equities “do not, by and large, offer significant exposure to the consumer sector,” considered by many to be the most promising opportunity in Africa, given forecasts of rapid middle class growth. Meanwhile Bloomberg reports that celebrated stock picker Mark Mobius, “who oversees $53 billion in emerging markets,” is “considering private equity investments as a way of tapping growth in Africa.” Private equity should offer a considerably less volatile ride than thin local stock markets, where waves of euphoria and panic have caused extremely steep value swings.
A SURVEY OF THE 100 LARGEST ALTERNATIVES MANAGERS SHOWS PE IS KEY. Private equity assets account for 33 percent of the slightly more than $3 trillion in assets held by the world’s top 100 alternative assets managers, according to consultant Towers Watson. Only real estate assets account for a greater percentage, edging out private equity at 34 percent of assets under management. The 97-page Global Alternatives Survey also shows that pension funds are the largest investors in alternatives, with some 19 percent of their capital invested in the area, up from 5 percent ten years ago. Private equity accounts for 14 percent of pension fund assets.
“MONEY MASTERS TALK PRIVATE EQUITY.” Five limited partners, considered among the U.S’s “best asset managers” by Institutional Investor magazine and honored this year as winners of the publication’s annual Investment Management Awards, provide private equity allocation tips in this 12-minute video. Among the highlights: Joseph Boateng of Casey Family Programs explains that he never wants more than 25 percent of his aggregate private equity commitment held in un-invested dry powder since “it becomes a drag;” Katheryn Crecelius of Johns Hopkins explains that PE investments outside the U.S. are the most appealing “because there are fewer experts, more challenges and therefore more opportunities to make strong returns;” while Susan Racher of the Walter H. Coulter Foundation counsels peers to “invest in every single fund that a particular PE manager has,” in order to avoid “stubbing your toe on a really bad vintage and not being able to make it up.”
“ACHIEVE OUTSIZE PROFIT AND OUTSIZE IMPACT” – that’s the promise Andrew Kuper, the founder of LeapFrog Investments, makes to investors in this case-study video from Privcap. Kuper argues that his firm’s “profit with purpose” investment strategy in insurance serves the needs of some two billion consumers “rising out of low income into the middle class” in countries like Kenya, Ghana, Nigeria, India, Sri Lanka and the Philippines. In emerging markets, “the era of the specialist fund is really coming into its own,” he says. Leapfrog launched a week after Lehman Brothers collapsed in September 2008 and took 20 months to finish fundraising, but it exceeded its $100 million target by 35 percent.
HERE’S A WEALTH OF STATISTICS ON U.S. PE DEAL-MAKING. According to Pitchbook’s latest quarterly Private Equity Breakdown, “PE firms invested $71 billion across 318 deals in Q2, down from 420 investments in Q1 and far off last year’s stellar fourth quarter, in which 671 companies received $141 billion in PE money.” The report also observes that several factors are “compelling PE investors to pursue more minority deals, not the least of which is the fact that deal-sourcing is difficult and firms have a real need to put capital to work.” A record amount of un-invested private equity commitments are likely to expire this year, meaning general partners who want to continue collecting fees on those funds are in a “use-it-or-lose-it” situation.