– Rising IPO Failures are PE Investment Opportunities
– Mega Firms zero in on HNWIs
– Staff Compensation is Emerging as a Major Challenge at Public Pension Funds
– KIC Says LPs Should Band Together to Make Better Investments
– EU Declares PE Funds Less Risky Than Hedge Funds
Rising IPO failures are investment opportunities for PE funds, posits Reuters. “Having started the year with a record $1 trillion cash pile, private equity funds have found few chances to spend it. Strong demand for initial public offerings and cash-rich companies muscled them out of deals. But that may be starting to change” as market volatility and “slowing global growth” derail the listing plans of companies. “Everyone in the PE community is looking at what IPOs haven’t gone ahead and whether they can get in on them,” one anonymous industry source tells Reuters. Spie, the energy services firm that recently cancelled what “would have been the largest French listing since before the financial crisis, is already being eyed by PE firms.” Meanwhile, Nomura investment banker Roy Kabla tells the Financial Times, in a story on the connection between market volatility and the growing number of failed merger and acquisition deals, that any decline in listed valuations gives private equity firms “a chance to be very competitive again in M&A, or vis-à-vis the IPO alternative.”
Mega-firms zero in on HNWIs. The New York Times DealBook reports that private equity fund management giant Carlyle “is close to establishing a new way” for high net worth individuals to invest in their funds. Designed to be the first in a succession of annual vehicles, Carlyle Private Equity Access 2014 aims to gather $200 million. Investors with at least $5 million in investable assets can “commit a minimum of $250,000, divided evenly across four of Carlyle’s current funds.” In addition to providing annual fees to wealth managers, investors pay Carlyle “1 percent to 2 percent of their capital plus 20 percent of any profits.” In the year through September, another industry behemoth, Blackstone, raised $10 billion from HNWIs, out of a total of $54.8 billion in new capital. Only $2.7 billion of $49.5 billion raised by Blackstone in 2011 came from HNWIs. Given anecdotal evidence, the sums from individuals may well rise. Morgan Stanley recently took “a single day” to raise $500 million from its HNWI clients for a Blackstone energy fund.
Staff compensation is emerging as a major challenge at pension funds. Edmund Truell, Duke Street Capital founder and chairman of the London Pension Fund Authority, is the latest industry professional to note that compensation is likely to stand in the way of new pension fund ambitions to invest directly in private equity transactions, according to Financial News. Investing directly, rather than through funds, is becoming a popular way for larger investors to bring overall fees down and to dial-up on what they hope are the best PE opportunities. The LPFA wants “to become more and more direct,” Truell says. “But that requires a lot of resource. Unfortunately, we aren’t allowed to pay anyone more than the prime minister and he is not paid very much” by the standards of private equity. “We are pushing to get exceptions to that.” As investors cross over into dealmaking, either through direct investing or co-investment, they are increasingly finding it necessary to hire expensive staff from fund manager teams. Many traditional public pension funds have neither the culture nor the available resources to do that.
Korea’s SWF sees co-operation as a way of making better investments. “Korea Investment Corporation, South Korea’s $72 billion sovereign wealth fund, plans to retool its direct investment program,” writes LBO Wire. “KIC has invested roughly $1 billion in direct private equity deals and committed an additional $1.3 billion to PE funds.The direct deals have fared worse than fund investments,” delivering 1.4 percent annually, versus 10.2 percent from funds. According to KIC’s new chairman and CEO, Hongchul Ahn, direct deals are underperforming largely because of “a lack of diligence and risk management, with KIC relying primarily on recommendations of investment advisers.” In addition to establishing a research department to evaluate direct investments, Ahn plans to team up with other SWFs and public pension funds so they can co-invest in each other’s deals. According to Ahn, good PE investment opportunities can be maximized “by sharing co-investment information” about regions where particular public pension funds or SWFs have a “knowledge advantage.” “Who could know more of Korean projects than KIC? Who could be better versed in what’s happening in Singapore than GIC or Temasek?” he asks rhetorically.
Did you know that private equity is less risky than hedge funds? Yup, that’s right. “PE has been classed as less risky than hedge funds in the latest draft of Europe’s rules on how much capital insurers must hold in reserve against certain investments,” reports Financial News. The Solvency II act, passed by the European Union Commission earlier this month, says insurers “should hold on to the equivalent of 39 percent of the capital they have committed to a PE fund to help guard against market shocks, putting the asset class alongside infrastructure funds and the equities listed in the countries of the Organisation for Economic Co-Operation and Development” in terms of risk level. Meanwhile, the EU has set a 49 percent prudential capital ratio “for hedge funds, equities listed in non-OECD markets and other alternatives funds.” The EU’s broad brush approach should be taken with a healthy pinch of salt. The weightings are “influenced by politics as much as by risk,” said one institutional investment advisor, who noted that insurers will be allowed under Solvency II “to create their own internal risk models” with lower prudential capital reserves for all asset classes.