– VC Beats Buyout Returns Significantly
– Endowment & Foundation PE Allocations Fall
– CalPERS to Write Bigger Checks to Fewer Managers
– European Bank-Loan Garage Sale is Well Underway
– European Direct Lending Grows by “Leaps & Bounds”
TWELVE-MONTH VC RETURNS BEAT BUYOUT GAINS SIGNIFICANTLY. “In the years since the dot-com crash of 2000,” returns from venture capital firms “have generally lagged behind” those from leveraged buyouts, reports The New York Times DealBook. But the trend “has recently reversed,” with the VC industry recording a 25.9 percent internal rate of return in the 12 months through June” – the latest period for which data is available. Buyout funds appreciated 22.4 percent over the same period. It’s the second time in a row that VC outpaced buyouts, “though the divergence this time was larger.” VC funds returned 19.7 percent through June, 2013, “ever so slightly more than the 19.2 percent return from buyouts.” The latest 12-month performance marks VC’s “best showing since the dot-com crash. In 2000, before the crash had ruined the industry’s results,” VC funds had a 38.1 percent annual return.
ENDOWMENT & FOUNDATION PE ALLOCATIONS FELL IN 2014, reports The Wall Street Journal, as institutions struggled to reinvest a wave of capital returned through the sale of fund assets. “For [U.S.] endowments and foundations that managed more than $1 billion, the average allocation to private equity fell to 12 percent in fiscal 2014 from 15 percent a year earlier,” notes the WSJ, citing data from the National Association of College and University Business Officers-Commonfund Study of Endowments.
CalPERS PLANS TO WRITE BIGGER CHECKS TO FEWER PE MANAGERS, as a story in the Financial Times makes plain. The move fits into a growing trend among investors where today’s record distributions from private equity funds are reinvested with a smaller number of managers. The aim is to invest as much as possible without compromising on manager quality. The challenge for the favored few among managers is not deviating from the strategies and tactics that have produced exceptional returns, while investing unprecedented amounts of capital. The California Public Employees’ Retirement System hopes to cut the number of PE managers it invests with “by more than two thirds, to 120 or fewer.” Explains Ted Eliopoulos, CalPERS’ chief investment officer: “By having fewer managers, at larger scale, we will be able to reduce our overall costs. We are looking at every possible lever to use to lessen the cost but make sure we still have access to the [fund manager] talent that we need.” Like a growing number of peers, CalPERS also says it will consider investing alongside other investors in order to invest more efficiently and profitably.
THE EUROPEAN BANK-LOAN GARAGE SALE IS WELL UNDERWAY, writes LBO Wire. “Under pressure from regulators and investors to clean up their balance sheets, European banks have unloaded loans at record pace. The huge debt portfolios have mostly been snapped up by private equity firms.” European banks “sold nearly €65 billion of commercial and residential property loans in 2014, compared with €27 billion in 2013, and €19 billion in 2012.” “Overall, U.S. private equity firms were involved in 81 percent of distressed-loan transactions in Europe last year.” That reflects the smaller number of experienced distressed-credit investors in Europe. According to 2014 estimates from PricewaterhouseCoopers, European banks hold more than $3.3 trillion in loans deemed non-core or distressed, many of which they will sell over the next half-decade or so. Given those numbers, 2015 loan sales to PE funds could set a new high.
DIRECT LENDING IN EUROPE “GROWS BY LEAPS AND BOUNDS,” writes the Financial Times, citing figures from Standard & Poor’s. “The rating agency said the European direct lending market had grown to more than €10 billion across more than 200 deals in 2014, from about €5 billion a few years ago. In this growing direct lending market, S&P estimates that credit funds have raised a substantial €45 billion of capital up to the end of 2014, which it expected to be deployed mostly in transactions led by private equity sponsors.” The growth of direct lending, earmarked mostly for PE-backed transactions and supplied for the most part by specialist private equity funds, reflects “the continuing shrinkage of corporate funding being offered by banks following the financial crisis.”