September 9, 2015
– Debate on Fee Transparency Rises in Intensity
– Calpers’ Widely Read Semi-Annual Report is Out
– Tech Start-Ups May Face a Far from Uniform Fall
– Fundraising Targeting Europe Hits a 7-Year High
– Firms Double Down on Energy
THE DEBATE ON PE FEE TRANSPARENCY HAS RISEN A NOTCH, with an announcement from the Institutional Limited Partners Association that they have developed a reporting template for investors. It aims to standardize reporting of all expenses paid to managers, including fees and carried interest, notes the Financial Times. Recently, the U.S. Securities and Exchange Commission “put pressure on private equity firms over how they disclose fees paid to them by the companies they own.” “There was a lot of internal discussion among investors given the SEC exams,” says Jennifer Choi, ILPA’s managing director of industry affairs. Additionally, a video of a California Public Employees’ Retirement System investment committee meeting that’s “been passed around the industry” is raising howls of protest from investors. “In it, the managers of the fund’s $29 billion PE portfolio appear to struggle to explain to trustees how management fees work.” ILPA’s effort “points to a logical and necessary progression for PE down the path of becoming a more institutionalized asset class,” says Peter Freire, ILPA’s CEO. The template isn’t mandatory, but that could change depending on SEC actions.
CALPERS’ WIDELY READ SEMI-ANNUAL PERFORMANCE REPORT IS OUT. The 17-page report contains a wealth of data on both the overall industry and on the private equity program of the U.S.’ largest pension fund. Demonstrating the difficulties of finding attractive assets after years of exceptionally high prices, “the PE program’s general partners have approximately $11.7 billion” of uninvested dry powder, “approximately 25 percent of which is from the 2006-2008 vintage years, though the investment period for most (if not all) of these funds should by now be expired.” At the same time, Calpers’ PE “net asset value decreased by $2.6 billion” to $28.9 billion in the year through June 30, reflecting the favorable environment for private equity asset sales and resulting fund distributions. Hit by declining oil prices, Calpers’ PE investments returned 8.9 percent in the 12 months through June, down from the 17.1 percent registered in the previous year. The data in the report also indicates that the pension fund has significantly scaled back its investments in funds-of-funds, while increasing commitments to customized investment accounts. The two respectively account for 6 percent and 20 percent of Calpers’ unfunded commitments.
“TECH START-UPS MAY FACE A LONG AND BUMPY FALL” with the best holding up relatively well, posits the New York Times. “As stock markets have tumbled, public company shareholders were not the only ones wondering what would become of their portfolios. Venture capitalists also began fretting about whether the plunge would cool the heady market for shares of private companies.” “The reason that there will likely be no uniform start-up deflation” is that “the prices for start-up shares generally reset only when the founders go into the market to raise money.” Start ups that can demonstrate an ability to survive “without the crutch of venture money to subsidize growth” may actually see little or no disruption to their value. As some companies “flounder” others that “have been prudent stewards of capital and can show a path toward profit will still attract capital, especially as billions of dollars” earmarked for VC has “not yet been invested.”
PE FUNDRAISING TARGETING EUROPE HITS A 7-YEAR HIGH, reports Private Equity International. As of September 3, total capital raised for Europe’s private equity funds stands at over $34 billion year-to-date, surpassing “fundraising in any year since 2008,” even with nearly four months left in 2015. This year has exceeded 2014’s total by 94 percent, and is some $3.6 billion shy of 2008’s tally. In 2015, 18 Western European funds have held final closes versus 27 for all of last year and 50 back in 2008. This reflects a global trend of increasing average fund-size. The European fundraising figures also support anecdotal evidence that Europe’s appeal has risen with the fall in the euro and a corresponding rise in expectations of bargain-priced acquisitions, particularly for dollar-based investors.
“PRIVATE EQUITY FIRMS ARE DOUBLING DOWN ON ENERGY,” despite taking a battering on investments made at market highs, writes the Wall Street Journal. “They are hoping the commodity-price crash will open up opportunities to pick up assets and entire companies on the cheap.” PE firms “have $115.6 billion available for energy deals…and they are looking for more, pitching pensions, endowments and other big investors on 67 energy-focused funds that aim to raise about $29 billion more” in equity. PE firms “have also amassed about $80 billion to invest in energy-company debt.” Declining gas and oil prices played havoc with some earlier energy investments, but “PE executives and bankers say many firms have become smarter buyers” and now “enlist technical experts” like petroleum engineers and geologists “as well as big-name oil executives to help them vet prospects.” Says Mark Papa, who was CEO at EOG Resources before joining energy-focused PE firm Riverstone earlier this year, “investments that are made in this low-price environment are going to look pretty good two or three years out.”