“PRIVATE EQUITY FUNDS ARE IN A MAD DASH FOR CASH,”
writes New York Times DealBook reporter Julie Creswell. “Nearly 2,000 private equity firms are making pitches to retirement systems, corporate pension funds and wealthy investors in the hope of raising nearly three-quarters of a trillion dollars.” That’s “more than what was raised over the last two years combined.” Analyzing those opportunities is a gargantuan task: “Officials at the Massachusetts Pension Reserves Investment Management Board, which oversees $53.9 billion in assets, reviewed 179 offering memorandums, met with 85 potential new fund managers and attended 48 annual meetings” last year. For many PE fund managers, “the success of their fund-raising season will depend in large part on how their boom-era funds performed” and how different their investment strategy is from competitors.
“BUYOUT DEBT RETURNS TO PRE-CRISIS LEVELS” IN THE U.S.
“By the end of September,” debt in private equity leveraged buyouts “equaled 5.3 times” earnings before interest, taxes, depreciation and amortization, the Financial Times observes, citing figures from S&P Capital IQ. “This is the highest ratio since 2007, when the average debt portion reached a peak of 6 times EBITDA.” Easily available credit is keeping asset prices inflated, making private equity general partners relatively wary of purchases. But much of the leveraged debt that’s been issued has gone to “big buyouts” which “have tapped welcoming credit markets to delay debt maturities.” In a wide-ranging interview in Real Deals, Robert Coke, the head of alternative investments at well-known limited partner the Wellcome Trust, says that private equity players are “being a bit more sensible about leverage than they were during the boom.”
“PRIVATE EQUITY TRIES TO CRACK” THE TRILLIONS HELD IN US DEFINED CONTRIBUTION PLANS.
“Though traditional corporate pensions have long dedicated portions of their portfolios to private equity, and the asset class ranks as a top performer for the plans,” PE “remains conspicuously absent on 401 (k) and other defined contribution platforms,” writes the Financial Times. While other PE managers are “still studying the market,” fund-of-funds group Pantheon Ventures has become “the first private equity manager” to offer a product designed to tap defined contribution plans, which have over $2.3 trillion in assets. But with traditional pension fund cash for PE investment likely to dwindle with the retirement of the baby boom generation, Palico’s founder, Antoine Dréan, writes in Forbes that “a more logical source of new money” are “sovereign wealth funds,” from the developed or developing worlds, and professional investors “from emerging markets.” Private equity investment from these groups - whose assets easily surpass those in defined contribution plans - is rising rapidly. Meanwhile, accessing individually-managed defined contribution plans remains problematic. Key challenges include investor psychology and creating low-cost structures that meet accredited investor restrictions.
NEW PRIVATE EQUITY POWERHOUSE INVESTORS ARE EMERGING IN KOREA,
reports Pensions & Investments. “The $65 billion Korea Investment Corp. has added about $3 billion in alternatives investments this year, putting the sovereign wealth fund half-way toward its goal of lifting private equity, real estate and hedge fund allocations to 20 percent of its portfolio.” It launched its alternatives program in 2009. Meanwhile Korea’s National Pension Service, “the country’s largest institutional investor,” with $379.1 billion in assets, has increased its allocation to alternatives by $2.65 billion since January. If the NPS increases alternatives to a planned 11.3 percent of assets by the end of 2014, from 9.1 percent today, that will boost investment in assets like private equity by some $8.3 billion, to $42.8 billion. Rising investment in alternatives “is part of a broader trend in Korea, as institutional investors grapple with subpar returns on Korean government bonds.” The alternatives push is “progressing alongside a move away from home country bias.”
ff VENTURE CAPITAL IS THE FIRST GP TO USE MASS SOLICITATION IN THE U.S.,
after an 80-year ban on publicly promoting private placements was lifted last month. “No one seems to want to go first, even though the way all of us raise capital is so old-fashioned,” John Frankel, a founding partner of the firm, tells Fortune magazine. “We’ve raised the majority of our capital already without generally soliciting, but we wanted to make a principled statement here.” A Palico blog notes that while the lifting of the ban “is a landmark event” for fundraising transparency, “several issues limit the value of the reform when it comes to private equity fund managers connecting with investors. Palico must follow ‘Know Your Customer’ rules and so is populated exclusively by accredited investors,” permitting fund managers and investors “to reach out easily and efficiently to each other.” The same post notes that Palico’s “reverse solicitation” system, where limited partners contact general partners first, allows fund managers to comply with a lighter regime of fundraising rules than the European Union’s Alternative Investment Fund Managers Directive.
CHECK OUT THIS VENTURE CAPITAL INDUSTRY ARTEFACT.
LinkedIn founder Reid Hoffman’s original pitch deck, used in 2004 to successfully raise Series B financing for LinkedIn, the massive social network for professionals that he founded, is now online. Hoffman adds extensive commentary and advice, providing valuable insight for entrepreneurs, general partners and limited partners. He also observes just how daunting the investing process is for both venture capitalists and entrepreneurs: “In a single year, the classic general partner in a venture firm is exposed to around 5,000 pitches; decides to look more closely at 600 to 800 of them; and ends up doing between 0 and 2 deals.”
WITH U.S. ECONOMIC DATA MISSING, CARLYLE STEPS INTO THE BREACH.
In what looks like an impressive testament to the depth and breadth of the investing power of the largest private equity firms, Carlyle has published its own estimate of third quarter U.S. gross domestic product, along with four other leading economic indicators. Carlyle says in its release that the information is intended to be “a reliable proxy for official data that are not currently reported due to the government shutdown.” Although the U.S. government re-opened last week, economic data on retail sales and other key indicators, scheduled for release this week, have been delayed until October 29. As a Washington Post story reports, Carlyle’s data, based on confidential information from its portfolio of 200 companies, “supports the idea that there has been no radical change in the pace of economic recovery in the last several weeks.” Carlyle pegs Q3 U.S. economic growth at 1.7 percent.
DOING WELL BY DOING GOOD.
That’s the aim of “impact investing” in private equity. Listen to this 12-minute Bloomberg podcast interview with John Coors, organizer of One Thousand & One Voices, to learn about one of the more ambitious efforts in this domain. Coors, who is currently using One Thousand & One Voices to raise a $300 million private equity fund that will invest in Sub-Saharan Africa, says building foundations on the non-profit model “does not work” because of dependence on donations. “The solution to raising people out of poverty is private enterprise,” he asserts. More specifically, the solution is private equity funds that create “wealth” and “prosperity for everyone engaged in the equation.” He plans to launch further private equity funds for Latin America, South-East Asia and Eastern Europe.