PE Key Trends Blog

PE KeyTrends - Fund Managers Race for Non-U.S. Capital

Jul 23, 2014 11:22:08 AM

Tags: PE KeyTrends, V2

- Record PE Sales in H1; Worst Acquisition Market in 3 Years
- Is it Dawn or Sunset for Venture Capital Valuations?
- PE Fund Managers Are in a Race for Non-U.S. Capital
- A Cautionary Tale for Minority PE Investments
- Offering Fund Carry to Portfolio Company Partners
- PE Quick Question Results 

PE "SOLD A RECORD AMOUNT OF ASSETS DURING THE FIRST HALF" OF 2014, unloading holdings worth $187.3 billion, reports The Wall Street Journal. That's "nearly double the $97.3 billion recorded" in 2013's first six months and surpasses the previous peak of some $160 billion in 2011's first half, according to Dealogic figures cited by the paper. Meanwhile, PE-backed acquisitions got off to their "slowest start in three years," with $128.7 billion in deals struck in the first six months of 2014. Nearly 20 percent of exit capital came from secondary buyouts, where private equity groups are on both sides of the transaction. Secondary buyout volume, considerably below the peak proportions of recent semesters, still hit $35.9 billion, the highest absolute level since 2007.


IS IT "MORNING IN VENTURE CAPITAL"? That's the title of a bullish 52-page powerpoint presentation from Mark Suster, managing partner of Upfront Ventures. Basing his optimism on the ubiquitousness of online credit card payment, on the fact that "everyone is socially connected" and on a relatively small universe of active venture capitalists compared with the dotcom bubble days, Suster declares that there is "an amazing opportunity set for venture capital for 2010 to 2020, duh." His high confidence mirrors industry zeitgeist, at least measured by numbers: peHUB reports that "venture investing set a 13-year record in the second quarter, rising to $13 billion." That puts 2014 "on track to exceed $44 billion," topping the $40.9 billion invested in 2001, when the Internet bubble definitively burst and "trailing only 1999 and 2000." Yet pessimism is growing regarding the sustainability of valuations. Institutional Investor writes that skepticism about "frothiness" was "rampant" among attendees at the annual Delivering Alpha conference. "Consumer internet companies without business models that aren't being bought by Google or Facebook don't stand a chance," declared Jim Breyer, one of the VC industry's most successful investors.


PE FUND MANAGERS ARE IN A "RACE" FOR NON-U.S. CAPITAL, writes Palico founder Antoine Drean in Forbes. The contest is "driven by a new fund manager priority to create uncorrelated global investor bases, capable of withstanding national, or even regional financial crisis." The result of this "intense courtship of non-U.S. investors" is that the fundraising market share of U.S. public pension plans is falling. The U.S. retirement funds are losing their traditional dominance of PE fundraising to non-U.S. sources like sovereign wealth funds and, more surprisingly, to emerging market pension funds. "If emerging market pension funds and sovereign wealth funds take the lead from U.S. public pension plans in backing PE managers, the vehicles of those managers will increasingly buy assets in their investors' home countries. That's marketing logic, but it makes investment sense too, given the high growth rates of the developing world," declares Drean.


HERE'S "A CAUTIONARY TALE" FOR PE INVESTORS WITH MINORITY STAKES. The Wall Street Journal details TPG's "ill-fated" minority investment in Strauss Coffee. The story "offers a lesson in how private equity firms can struggle in souring deals when they aren't in the driver's seat." It's a tale of years of "squabbling" over executives, fees, office leases, failed deals, sales forecasts and the timing of an initial public offering. None of this helped the value of TPG's 25 percent stake in Strauss, purchased for $293 million in 2008. After bitter fighting that saw Strauss accuse TPG in an Amsterdam court of "plotting a 'pump and dump IPO'", the two sides "are close to agreeing on terms" of a listed-share offering "that would enable TPG to untangle itself." Yet "an IPO would be a small victory for TPG." The fund manager "values its coffee investment at just 10 percent more than it paid - a paltry return over nearly six years. Buyout firms typically aim to double their money or more."


A MANAGER OFFERS PORTFOLIO COMPANIES A STAKE IN FUND CARRY. The New York Times DealBook details emerging manager Kent Goldman's plan to help clinch deals with heavily-courted potential portfolio companies. Goldman, "a former partner at First Round Capital, who left this year to start a new venture capital fund," Upside Partnership, promises the owners of companies he buys stakes in "something extra: investment profits." "It's a new type of partnership and something that I don't think has been tried," says Goldman. A "'double-digit percentage' of his personal cut of the fund's profit" will be allocated to company owners. "I want to build a really strong founder community. I thought one way to encourage that would be to make it so every" owner "felt as though they were an investor in other businesses in the portfolio."



  • 66 percent of fund-manager poll respondents say they have or will seek capital in emerging markets
  • 83 percent of poll respondents say the appeal of private equity careers versus careers in investment banking has increased significantly with the curtailment of banks' proprietary trading.
  • Only 22 percent of poll respondents believe long-dated PE funds, where the investment cycle goes beyond the standard 10 years, have significant potential to attract investors.