October 8, 2015
– Canadian-Style Consolidation is Coming to U.K. Pensions
– Fundraising: Set to Surpass 2014 by a Hair
– Fee Pressure Gets Serious, at Least According to Some
– PE Firms Looking to Capitalize on Rising Corporate Defaults
– Surprise! Large Buyout-Backed IPOs Outperform Tech IPOs
CANADIAN-STYLE CONSOLIDATION IS COMING TO U.K. PENSIONS. As in Canada, where the pooling of smaller public pension fund assets was pioneered, the move should increase public pension fund firepower in fee negotiations and optimize private equity coverage, permitting schemes to not only invest in a broader range of strategies and geographies, but also to invest directly alongside fund managers and on their own. Private Equity International reports the U.K. will pool “89 existing local authority pension funds into six British wealth funds managing assets of more than £25 billion each.” A separate PEI interview with Edi Truell, the head of the Strategic Investment Advisory Board counseling The Lancashire and London Pensions Partnership – “newly formed out of the London Pensions Fund Authority and the Lancashire County Pension Fund” – gives an idea, on a smaller scale, of the benefits of pooling. Truell says the £10.6 billion-in-assets LLPP will save £75 million annually over five years in PE and other investments, as it replaces fund-of-funds with funds, negotiates lower fees for larger investments and embarks on direct investments. Pundits, including Truell, have noted that consolidation can bring the biggest benefits in PE.
PE FUNDRAISING THIS YEAR IS ON TRACK TO SURPASS 2014’s TOTAL by a hair, according to Private Equity International. In the first nine months of 2015 “funds have raised a total of $289.6 billion,” or an average of $96.5 billion per quarter, versus a quarterly average of $96.4 billion last year. PEI notes “fewer funds closed in the third quarter of this year compared to the same period a year before,” although more capital was raised. Between July and the end of September this year, 135 funds raised $92.4 billion versus 165 funds closing on $80.3 billion in the third quarter of 2014. “Funds focused specifically on Europe showed strong closes in the third quarter of this year, with 23 funds raising $30.2 billion.”
FEE PRESSURE GETS SERIOUS, AT LEAST ACCORDING TO SOME. “There are clear signs of investor discontent with current fee practices,” writes the Financial Times. “More than three-quarters of 151 private equity firms and investors polled by Sungard believe fees will fall in the next two years.” Meanwhile, an Ernst & Young report shows “that the biggest problem for investors in buyout funds is the current level of management fees. Thirty percent of investors said they would like to see this change.” In particular, investors object to fees levied on uninvested capital. Yet “many in the industry doubt whether PE firms will amend fees.” “Two thirds of investors pay fees in adherence with” a standardized model consisting of a 2 percent annual levy on invested and uninvested capital and a 20 percent fund manager share of capital gains above an 8 percent preferred return to investors. Says James Chen, an analyst in the managed investments group at Moodys: Given the choice, “investors will pick the fund with higher fees and a better record” over one with lower fees, despite the increase in publicly aired gripes.
SANKATY IS THE LATEST FIRM TO CAPITALIZE ON EXPECTED DEFAULTS. Bain Capital’s credit investment arm, Sankaty Advisors has gathered $2.1 billion, or 60 percent, of its $3.5 billion goal for Sankaty Credit Opportunities VI. Sankaty and a number of other firms are preparing for “a new cycle of defaults,” notes Bloomberg. “Global corporate defaults have accelerated to the fastest pace since 2009,” according to Standard & Poor’s. “The credit rating firm said 79 companies defaulted on their debt in the first nine months of the year, compared with 60 in all of 2014. Metals, mining and steel companies have the highest proportion of distress followed by oil and gas producers.” Apollo, Ares, Blackstone, Oaktree and Z Capital are among PE firms “positioning themselves for more distressed opportunities after low defaults and low yields prompted record debt issuance.”
SURPRISE! LARGE BUYOUT-BACKED IPOs ARE OUTPERFORMING TECH IPOs, reports LBO Wire. Since the beginning of 2013, 41 companies raising more than $300 million with debt representing more than three times annual earnings have been sold by leveraged buyout firms through initial public offerings. On average, those IPOs are up 68 percent “since their debuts” versus 14 percent and 28 percent increases for Tech IPOs and all IPOs. The outperformance of relatively big LBO-backed IPOs “is a big reason” why PE firms “continue to bring more of these deals to market, including First Data Corp’s $3 billion offering and Performance Food Group’s $416 million deal.” What’s the appeal for stock investors? “It’s usually not revenue growth, as most of them are single-digit growers.” The attraction is the ability of the companies to boost profit by paying down debt – particularly during a time of fairly anemic global growth. On average, larger leveraged buyout-backed companies, helped by IPO proceeds, have cut debt by a fifth post-listing.