– New Demand for Longer-Term, Lower-Fee Strategies
– PE Managers Successfully Wooing Individuals
– A Buyers’ Market Takes Shape in Europe
– Under SEC Pressure, Fund Managers Clarify Fees
– Sector Specialists Outperform Generalists
LONGER-TERM, LOWER-FEE PE STRATEGIES ARE TAKING HOLD. Blackstone, CVC, and Carlyle are all either launching or exploring new low-cost funds that aim for investment returns that are roughly a fifth lower than the classic buyout fund’s 20 percent annual target. Dubbed “core” private equity, the vehicles lock-up investments for as long as twenty years, which is double the typical PE fund’s life span. The catalyst is demand from “cash-rich investors” who “are increasingly striking deals with PE fund managers as they seek to invest mounting cash piles,” writes the Financial Times. One big plus for investors: “in return for committing large amounts at once,” they “are able to lower the expensive fees that PE groups charge.” Reporting on Blackstone’s project – still in the idea stage – Reuters observes that the “vehicle would invest in slower-growing but safer companies” than those typically targeted by PE funds. Meanwhile an investor tells Bloomberg “the longer lives of these funds removes the need to redeploy capital frequently” in a low-interest rate environment. The inspiration for core PE is widely considered Blackstone’s highly successful Tactical Opportunities group. It invests in assets that don’t meet the timing and return criteria of the firm’s mainstream vehicles.
PE MANAGERS ARE “WOOING INDIVIDUALS, AS INSTITUTIONS CUT COSTS,” writes Palico founder Antoine Drean in his latest Forbes column. “Institutional investors are getting more bang for their buck in low-cost separate accounts and other alternatives to classic funds, encouraging managers to combat thinning profit margins by targeting individual investors.” This is being done with surprising effectiveness. The fundraising market share of high net worth individuals, measured at least on a quarterly basis, “has hit double-digits for the first time.” Those with investable assets of more than $1 million account for 10 percent of private equity capital raised in 2014’s first 10 months, up from just 6 percent in full-year 2008. Behind the recent growth “are well-oiled partnerships between PE groups and a handful of leading global brokerages.” For the brokerages, “it’s a volume game,” with a few basis points in extra fees levied on top of the classic fund’s traditional ‘2 and 20’ fee formula. “Similar brokerage-sponsored campaigns, using low-commission feeder funds, are gearing up to target retail investors, promising greater access to private equity for individuals.”
FOR PE FUND MANAGERS, A BUYERS’ MARKET TAKES SHAPE IN EUROPE. “European price multiples are finally stabilizing,” driven by a pan-European “stock market correction, uncertainty over Eurozone deflation and a lack of growth,” writes Real Deals, citing data from PE fund manager Argos Soditic. That’s good news as “private equity players still have huge amounts of capital to deploy and face intense competition.” While the quarterly mid-market purchase price multiple for Europe’s PE buyers rose 1 percent to 8.4 times corporate cash flow in the three months through September, the average price for trade buyers in the same period dropped 6 percent to 7.9 times cash flow. This “marks a stark change in the confidence of strategic buyers who for the last three consecutive quarters have paid higher multiples than buyout houses.” Meanwhile, noting that Bain Capital surpassed its fundraising target by €1 billion for its €3.5 billion European buyout fund, the New York Times DealBook reports that “many PE dealmakers are investing at a healthy clip in Europe, particularly as valuations in U.S. markets appear prohibitively high.”
UNDER SEC SCRUTINY, PE FUND MANAGERS MAKE FEES “CRYSTAL CLEAR.” The Wall Street Journal finds that fifteen private equity fund managers recently “revised their regulatory filings amid pressure from federal securities regulators.” The revisions “cover an array of buyout-firm practices that the Securities and Exchange Commission has scrutinized over the past six months” and they “aim to head off unwanted attention from the agency.” Marco Masotti, a lawyer at Paul, Weiss, Rifkind, Wharton and Garrison tells the WSJ: “Everyone is doing it in response to the regulatory climate and the statements that have been coming out of the SEC;” various fee and expense practices are now being made “crystal clear.” A number of firms that have amended their regulatory filings have also held meetings with investors to explain the changes. Watch for these housecleaning trends to amplify considerably.
“SECTOR FOCUSED MANAGERS DO IN FACT OUTPERFORM” GENERALISTS, declares a new study from Cambridge Associates. Covering funds from 2001 through 2010 with realized and unrealized investments, Cambridge finds that sector-focused funds have returned an aggregate 2.2 times invested capital for a 23.2 percent gross internal rate of return. The comparable figures for generalists are a 1.9 invested capital multiple and a 17.5 percent gross IRR. Cambridge defines sector specialists “as managers that have historically invested more than 70 percent of their capital in one of four sectors – consumer, financial services, healthcare, and technology.” Cambridge notes that the typical sector specialist is better than the average generalist at sourcing investments, adding value post-acquisition, and at creating premiums through exit strategies.