Private Equity KeyTrends #26 – February 05, 2014

writes The Wall Street Journal. The National Association of College and University Business Officers-Commonfund annual survey of U.S. educational endowments shows that allocations to alternatives like private equity dropped just 1 percentage point on average in 2013 to 53 percent of assets. A preliminary report released in November showed a steeper 7 percentage point average decline for alternative allocation. According to the final NACUBO-Commonfund press release, “several large institutions reported significant increases in their allocations to private equity” late in 2013, accounting for the difference between the preliminary report and the final figures. “The relative pause in the decade long growth of alternative strategy allocations will bear watching,” the release notes. A record $120 billion in net cash was returned from PE funds to investors last year. Reinvesting that at a pace that maintains investors’ target allocations to PE will be difficult without lowering return expectations. NACUBO notes that PE returned 9.1 percent in 2013, versus 20.6 percent for domestic equities, the best performer for educational endowments last year.



PE GROUPS CONTINUE TO FUEL “A SURGE OF EUROPEAN INITIAL PUBLIC OFFERINGS,” according to the Financial Times. About 300 flotations could raise as much as $73 billion globally in the first quarter of this year,” an 85 percent jump from the same period in 2013. That “would bring IPO activity back to the levels seen during the years that led to the collapse of Lehman Brothers in 2008.” Private Equity fund managers, who have “struggled to return cash to their investors after markets shut down more than five years ago, are an important driver” of the IPO bonanza. PE’s annual share of European IPOs “more than quadrupled to 46 percent last year.” The FT concludes, “history shows that IPO windows can quickly shut down after a geopolitical event or economic shock. But so far, investors do not appear to be concerned about the market overheating.”


TPG JOINS THE RANKS OF GPs OFFERING NON-TRADITIONAL STRUCTURES.Reuters reports that TPG successfully solicited the Oregon Investment Council for a $700 million commitment to a “bridge fund” structure designed to provide TPG Capital with investment firepower as it awaits further performance improvement in its flagship funds. The bridge fund may hit $2 billion and “is the clearest sign yet that TPG’s fund performance has affected its fundraising plans.” Speaking at a meeting of the OIC, TPG co-founder James Coulter said, “you will from time to time, make mistakes. The important thing is to learn from them.” TPG made some “huge bets that went sour,” Reuters notes, but the firm has also had some “recent lucrative exits from its investments.” Referring to the latter deals, Coulter told the OIC, “we had an extraordinary exit year and we expect another one.” TPG is the latest and the most high profile general partner to employ a relatively short-term bridge fund as a means of overcoming a difficult fundraising period linked to relatively poor performance in classic long-term funds. Bridge funds often offer investors lower fees and veto power over participation in particular investments.


PE FUND MANAGERS THINK THAT THE TIME TO BUY MINING ASSETS IS NOW.“The world’s mining assets may be the target of mergers and acquisitions as an $8 billion pool of private equity money that has lain dormant is stirred this year by attractive valuations and predictions of resilient demand for raw materials,” writes Bloomberg. “Only about 14 percent of the almost $10 billion raised in the last two years” for mining acquisitions “has been deployed.” With low inflation, prices for many metals and minerals fell in recent years. “While valuations remain depressed, potential buyers are attracted by signs that the bottom might be near,” as major mining companies seek “to shed unwanted and higher-cost assets as part of an industry-wide push to trim expenses.” Michael Scherb, a former mining industry banker, who just closed the $375 million PE mining fund, Appian Natural Resources, tells Bloomberg: “We’ve hit the timing just right.” Other PE fund managers actively looking for mine acquisitions include Warburg Pincus, Brookfield Asset Management and Magris Resources, founded by former Barrick Gold CEO Aaron Regent.



HERE ARE TWO ENLIGHTENING TALES FROM THE PRIVATE EQUITY FRONT LINES.In a Privcap video, Charlie Ayres, chairman of Trilantic Partners, describes his firm’s “white knuckle” spinout from a collapsed Lehman Brothers. His story underlines that the make-or-break issue in times of crisis at private equity funds is often team stability. Notes Ayres, “we did not lose anyone from the team” from six months before the bankruptcy of Lehman “until we emerged” as an independent firm six months afterwards. Meanwhile, in a story of true grit, Charlie O’Donnell recounts in Fortune magazine the trials he faced gathering capital for his successfully closed venture capital fund, Brooklyn Bridge Ventures. O’Donnell says, “the biggest lesson learned and where I wasted a good four or five months, was in spending too much time” with large investors. He encourages first-time fund managers to simultaneously pitch all investors – big and small – in order to build a virtuous circle of fundraising momentum.




  • As evidence suggests that PE investors in North America and Europe lack the resources to properly vet smaller emerging market funds, more than 60 percent of KeyTrends respondents say they would like to be investing more than they currently can in smaller emerging market funds.

  • Amid expectations that PE investors may have difficulty reinvesting the record net cash returned to them in 2013, slightly more than 30 percent of KeyTrends respondents say they are likely to cut or fall short of target allocations to PE in 2014.

  • Some 43 percent of KeyTrends respondents expect the percentage of PE fund stakes sold at par or better on the secondary market to increase in 2014, in an environment where buyers hold an estimated $55 billion in uncommitted capital for secondaries.


  • A large number of LPs – including multi-family offices, gatekeepers, endowments and foundations – are looking to increase their private equity real assets exposure in 2014. Infrastructure is getting particular attention, with surprisingly strong interest shown in emerging managers raising funds of less than $1 billion.

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