– Hand-Wringing Venture Capitalists Keep Investing
– Will CalPERS Cut PE Now that It’s Eliminating Hedge Funds?
– Blackstone’s Tactical Opportunities Fund Model May Multiply
– South Korea’s Exit Market is Particularly Difficult
– Middle East PE Investment Soars
– PE KeyTrends Quick Question Results
BILL GURLEY’S HAND-WRINGING TOUCHES A RAW NERVE IN SILICON VALLEY, BUT VC MONEY KEEPS FLOWING, including his own. A partner at Benchmark, and one of Silicon Valley’s most celebrated investors, Gurley told The Wall Street Journal that the VC community “is taking on an excessive amount of risk right now – unprecedented since ’99.” The comments unleashed a storm of chatter, also documented by the WSJ. Most VCs seem to agree with Gurley’s conclusion: while sharply rising valuations and steadily rising expenses for start-ups are worrying, investors “can’t afford not to be out on the field,” investing. The conflicting sentiments of the industry are summed up in the reaction of another noted investor, Jeff Bussgang, general partner of Flybridge Capital Partners: “There is definitely the dynamic that you need to keep dancing until the music stops, just make sure you aren’t left without a chair. I think there is at least a 50 percent chance that the music will stop in the next three years. But the final two years can be an awesome period for wealth creation.” The lesson for limited partners: exercise caution.
“CalPERS CUTS OUT HEDGE FUNDS – IS PRIVATE EQUITY NEXT,” asks Fortune columnist Dan Primack. He thinks not, credibly taking issue with the giant pension fund’s statement “that it no longer will invest in hedge funds in ‘an effort to reduce complexity and costs.'” PE “has virtually identical” fees compared to hedge funds and even greater complexity, since it’s more illiquid, encompasses an enormous range of strategies, and lacks “universally accepted valuation standards.” Primack “submits” that while CalPERS is bothered by complexity and costs, its decision to cut hedge funds more likely resulted from the pension fund’s lack of scale in the asset class – just 1.4 percent of its overall investment portfolio versus a goal of at least 5 percent. “CalPERS continues to invest heavily in PE,” in part because its investment characteristics are different from those of hedge funds, despite fee and complexity similarities, concludes Primack. For CalPERS, annual private equity returns have “not only been stellar (13.8 percent net returns for the past decade),” but they are less correlated with other investments than those of hedge funds.
BLACKSTONE’S TACTICAL OPPORTUNITIES FUND COULD LEAD TO SIMILAR FUNDS FROM OTHER GPs. This is, arguably, the key conclusion to be drawn from a peHUB story detailing Blackstone’s success with its first Tactical Opportunities fund and its decision to start fundraising for a second TacOpps fund. Composed of large, non-discretionary separate accounts, and a commingled vehicle for smaller limited partners, TacOpps “pursues investments that don’t fit the mandates of Blackstone’s primary business lines” and that cross multiple investment strategies, “from distressed mortgage loans and property investments in Latin America to shipping opportunities.” The strategy creates synergies that can be very appealing for both investors and Blackstone. For example, TacOpps might invest in a potentially lucrative minority stake that Blackstone’s classic private equity vehicles come across, but which they pass on because of a lack of control. The first TacOpps fund, launched in 2012, and with some $5.6 billion under management, is generating a net annual return “of around 23 percent.” Blackstone has begun fundraising for a second TacOpps fund targeting $7 billion to $8 billion. Don’t be surprised if other general partners launch similar vehicles.
SOUTH KOREA’S PRIVATE EQUITY MARKET FACES A CHALLENGING PERIOD, writes the Financial Times. After a decade of impressive growth, “South Korea is now home to about 240 private equity funds, with assets under management of roughly $42 billion,” according to this overview. The greatest challenge for the country’s general partners is a dearth of exit options. There is “a lack of strategic buyers” for domestic private equity assets, with major corporations mostly interested in cross-border acquisitions and second-tier firms struggling with a sluggish domestic business environment. The secondary buyout market – where one PE firm sells assets to another – is also “under-developed.” In addition to investing in companies with “good fundamentals,” the “key” to successful PE investing in South Korea is “having clear exit paths,” says James Yoon, a partner at local PE fund manager MBK.
PRIVATE EQUITY INVESTMENT IN THE MIDDLE EAST SOARS, despite war and unrest in the region. “Acquisitions by PE firms in the Middle East and Africa have surged to $6.6 billion” through September this year, up “from $141 million in the same period in 2013,” Bloomberg notes. “The flurry of investments follows a revival in the Middle East economies, amid strong oil prices and increased government spending.” First time investors in the region include Blackstone, “which teamed up with Dubai-based Fair Capital to invest in GEMS Education,” a major private operator of schools, and Warburg Pincus, which bought a stake in Mercator, an aviation software solutions company. Meanwhile, “the value of buyouts in the U.S. slumped by 76 percent to $20.8 billion through September 19, compared with the same period in 2013, while European dealmaking is down 41 percent. “PE investors are also finding it easier to sell their Middle East investments.” In Egypt, with the local stock market up 40 percent this year, “two companies with PE owners are considering IPOs:” snack maker Edita Food Industries and Amoun Pharmaceutical Co.