Private Equity KeyTrends #35 – June 10, 2014


– Investors Want PE, but Struggle to Increase Allocations
– Foreign Funds Replacing U.S. Capital
– Retail $$s Not a Substitute for Pension Funds
– LPs Band Together to Increase Leverage & Knowledge
– VC Guru Mary Meeker Dismisses Talk of Tech Bubble
– Chinese VC hits a Sweet Spot
– PE KeyTrends Quick Question Results

INVESTORS WANT MORE PE, BUT MANY STRUGGLE TO INCREASE ALLOCATIONS. The results of this year’s AMP Capital Institutional Investor Report lends credence to what industry pundits call an increasingly bifurcated market among private equity fund investors, with some pulling back from PE investments as others aggressively increase investment. Private Equity International’s coverage notes AMP found that 45 percent of institutional investors “expect to increase their holdings in PE during the first half of 2014,” with those in Europe and the Middle East “most likely to target greater exposure.” But the report shows that “some pension schemes, in particular those preparing to enter their drawdown phase, are nearing their governance limit for investing in illiquid assets.” Moreover, a number of high profile private equity investors – including CalPERS – are cutting back on PE after record distributions. This is to avoid finding themselves in a situation where fund selection criteria must be lowered.


That idea is reinforced by a Privcap video interview with Donald Gogel, chairman and chief executive of private equity fund manager Clayton Dubilier & Rice. Gogel notes that more than half of the $6.4 billion raised for CD&R’s new flagship Fund IX, which closed in early May after turning down around $2 billion in extra investment, came from investors outside North America. Much of the money came from sovereign wealth funds concentrated in Asia and the Middle East. That’s “obviously quite different than the first fund I raised at CD&R, when less than 20 percent was non-North American,” says Gogel. A growing reservoir of non-North American institutional investor capital earmarked for private equity is seen as one of the most promising potential substitutes for cash coming from the industry’s traditional mainstay: defined-benefit U.S. pension funds. The number of defined benefit plans continues to shrink and they now face huge payouts to America’s retiring baby-boom generation.


USING RETAIL DOLLARS AS A SUBSTITUTE FOR U.S. PENSION FUNDS IS CHALLENGING. That’s the inevitable takeaway from a New York Times story whose jump-off point is “an increasing interest” in private equity from affluent “do-it-yourselfers.” The story notes that wealthy individuals who make a success of private equity investment must have exceptional access to knowledge and to due diligence resources. “You have to be fully versed in what you’re doing,” says Robert M. Hofeditz, “who works in private equity and also has 40 percent of his wealth invested in PE.” “It’s not for everyone.” The story encourages the idea that institutional investors are likely to have considerably greater success investing in private equity than are individuals.


CONSOLIDATION AMONG FAMILY OFFICES IS A NEW TREND. This Bloomberg story documents how family offices are “pooling assets and knowledge” to gain pricing leverage and to get access to higher quality private equity opportunities. While the opportunities detailed in the Bloomberg piece involve private equity direct investment and co-investment, the logic behind the efforts to consolidate also applies to traditional PE fund investment, where complaints about a two-tiered market for limited partners have been growing in recent years. Often the biggest investors use the size of their fund commitments to negotiate better terms than those available to other investors. Investors with richer resources can also more thoroughly cover and evaluate a growing range of specialist investments and geographically-distant opportunities.


SILICON VALLEY IS NOT IN A BUBBLE, SAYS MARY MEEKER, the influential venture capitalist and former tech stock analyst. Meeker, a partner at Kleiner Perkins Caufield & Byers, puts out a “report on Internet trends every year that is a sort of farmer’s almanac for the tech industry,” observes The New York Times. “All the crucial data is in one place,” with Meeker’s “particular spin on what’s most important.” Meeker’s exhaustive, 164-page 2014 report, chock-full of tables and graphs, makes one particularly crucial contention: that we are not in the midst of an Internet bubble despite what The New York Times calls “screaming valuations for private companies like Uber and Airbnb.” Meeker notes that initial public offerings of tech stocks are 73 percent below the 1999 peak and that venture financing is 77 percent below its 2000 record, while the technology sector’s market value is only 19 percent of the S&P 500’s valuation, versus 35 percent of the index’s value at the height of the last bubble.


CHINA HITS A VENTURE CAPITAL SWEET SPOT. The Wall Street Journal reports that four Chinese venture capital firms “secured $2.23 billion” in commitments in the two weeks ending June 5. The amount raised by Shuwei Capital, IDG Capital Partners, Legend Capital and GGV Capital since May 22 already surpasses quarterly totals “going back to the fourth quarter of 2011,” when Chinese venture firms raised $3.48 billion. “For some time, limited partners have treaded cautiously when allocating to Chinese venture capital, as returns from general partners slowed amid fewer initial public offerings and lackluster dealflow. But Chinese e-commerce giant Alibaba Group Holdings’ forthcoming IPO in the U.S.” and online retailer’s recent $1.8 billion Nasdaq offering are “reviving interest” in Chinese tech companies. “There are many technology fund managers in China, but what defines” the four firms that recently raised “is their streak of investment hits.”


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