– PE Fund Restructurings Divide Industry
– SWFs Unlikely to Cut PE Investments Despite Low Oil Prices
– Calpers’ PE Fund Manager Cull Detailed
– Caution is the Theme of Mary Meeker’s Annual Internet Report
– Surprises in Coller Capital’s Summer Survey
RESTRUCTURING DIVIDES PROFESSIONALS. Once private equity managers can’t raise follow-on funds due to the poor performance of investments, should they hold onto those assets in the hope of selling at a better price, or should they liquidate, risking a fire sale? As more managers gain time by engineering deals in which investors either rollover into new vehicles or sell fund stakes to new investors, often at a substantial discount to net asset value, the question is increasingly divisive. A Financial News story pits an investor who advocates the current liquidation of PE assets held by Gresham, even if pricing is not always ideal, against another who accuses the fund manager of not doing enough to sell at the right price. Meanwhile a PE Hub editorial laments restructurings that present investors with “two bad options:” Either sell now at a discount to net asset value or continue paying fees for a new vehicle that holds the assets responsible for poor historic performance. As PE Hub observes, regulators are now looking into restructurings.
DESPITE FUNDING CUTBACKS, SWFs ARE UNLIKELY TO CUT PE INVESTMENT. That’s the implication of Invesco’s annual survey of 59 sovereign wealth funds, government pension funds and central banks worldwide. Discussing the study, Nick Tolchard, head of Invesco Middle East, tells the Financial Times: “Middle East sovereigns” feel “funding” for investments will continue “despite the low oil price.” The FT notes the research “highlights the positive outlook from most regional funds, whose governments are seeking long-term” private equity-style returns “for future generations or domestic development.” Though the survey finds that 62 percent of Middle East SWFs believe they will have to liquidate assets to fund fiscal shortfalls if oil prices fall to $40 a barrel for two years, the FT observes that this – “at least for now” – seems a “distant prospect.”
CALPERS’ PE CUTS WILL CREATE “SOME BIG WINNERS AND LOSERS,” observes the Wall Street Journal in an article detailing the plans. The California Public Employees’ Retirement System intends to “sever ties with roughly half of the firms handling its money” in one “of the most aggressive industry moves yet to reduce” management fees and improve portfolio monitoring abilities. “As recently as 2007, Calpers had about 300 external managers – a remnant of its pioneering foray into alternative investments such as real estate, hedge funds and private equity.” It now has 212 and plans to have only 100 in five years. But the cut back “won’t fundamentally change Calpers’ investment strategy, or the percentage of assets” managed by external managers. Remaining managers “will simply get a bigger pool of funds.” The move by the U.S.’ largest pension fund “could have broader ramifications.” Calpers “is considered an industry bellwether because of its size and history as an early adopter of alternatives.” Notes Allan Emkin, a managing director at Pension Consulting Alliance: “There really will be a significant amount of discussion at other pensions” about following Calpers’ example.
MARY MEEKER’S MUCH ANTICIPATED ANNUAL INTERNET TRENDS REPORT IS OUT. Many investors believe, as PE Hub does, that “few people can offer a better perspective on the runaway valuations now defining segments of private company investing” than Meeker. An investor at Kleiner Perkins Caufield & Byers, and one of the world’s most respected internet analysts, Meeker’s 196 slides do not explain where she sees “undervaluation and overvaluation,” but they strike an overall note of anxiety. Key takeaways highlighted by PE Hub are that “while internet and smartphone use is growing around the world, its growth is slowing,” while “the same trend is true” for the transmission of internet and smartphone-related data traffic. “Add to this that the growth of annual revenue per user at top internet companies like Facebook and Twitter is slowing, and you have several reasons for caution” in an environment of historically high prices for assets.
THE LATEST COLLER CAPITAL GLOBAL PE BAROMETER HOLDS SURPRISES and confirms trends. Among the highlights of the bi-annual survey of 113 limited partners: “half of European LPs and a third of North American LPs” are below their target allocations to private equity; “approximately one third of LPs say they plan to invest in oil & gas PE funds” following the recent fall in oil prices; “LPs have a more positive view of PE risk/reward in India, Japan, Taiwan, Korea and Australia than they did three years ago” while “fewer have doubts about Indonesia and Malaysia,” though they are more negative concerning “the outlook for China;” “over half of LPs have recently invested in new GPs’ funds and “nearly all the debut funds from new GPs in which LPs have invested since the financial crisis have equalled or outperformed the rest of their PE portfolios.”