– Leon Black Sees a New “Asset Accumulation” Era
– Buyout Firms – Some – Push for Better Terms
– PE Investors Are Pessimists Compared to PE Managers
– European Venture Investment is at a 14-Year High
– SEC Plans Guidelines for Fund Restructurings
BELLWETHER APOLLO HAS ENTERED AN “ASSET ACCUMULATION CYCLE” and moved out of the “excess distribution cycle,” proclaims Leon Black. The chief executive of global private equity firm Apollo made headlines two years ago when he said he was “selling everything not nailed down,” amid exceptionally high prices for acquisitions. The statement proved prescient, coming at the start of an era of record exits and distributions for PE, and a relative dearth of investment opportunities. Black’s latest declaration came during his firm’s third quarter earnings call, reports Private Equity International. Is it a sign that PE-backed purchases will rise significantly – particularly in relation to exits, and committed but unspent capital? Black believes expectations of rising U.S. interest rates will create market “volatility” and new, attractive valuations for PE purchases. Time will tell.
BUYOUT FIRMS – SOME – PUSH FOR BETTER TERMS. “Top buyout firms are taking advantage” of strong fundraising and changing terms “to enable their executives to be paid profits more quickly,” writes Financial News. BC Partners, which previously shared in profits only after investors received more than their fund commitment, now proposes being paid “a portion of every profitable deal.” EQT Partners is also getting deal-by-deal capital gains for the first time, while Valedo is increasing its profit share to 25 percent from 20 percent. Advent International “has scrapped its hurdle rate – an agreed rate of return, typically set at 8 percent” – that PE firms must deliver before they get profit. “The most in-demand PE firms are clawing back power” with changes, but it’s risky. “If terms are changed and you underperform this will not make things easy during the next fundraise,” says Graeme Gunn, partner at fund-of-funds SL Capital Partners.
PE LIMITED PARTNERS WOULD SEEM A PESSIMISTIC BUNCH, at least compared to general partners. Pensions & Investments reports on a wide-ranging Palico survey of 92 private equity investors and 159 managers that among other things shows that “a larger percentage of general partners” than limited partners “expect private equity returns to rise.” The survey notes that nearly two-thirds of general partners, or managers, “see PE returns rising over the next three to five years,” while just one third of limited partners, or investors, believe they’ll rise. Nearly 40 percent of LPs think returns will fall, versus just 14 percent of GPs. The remainder of LPs and GPs – respectively 27 percent and 21 percent – see returns staying “the same.” Despite these results, most LPs think their peers have on “rose-tinted glasses,” as PE Hub’s story on the survey notes. Some 71 percent of LPs and 55 percent of GPs are under the impression that LPs have “unrealistically high” PE return expectations.
EUROPEAN VENTURE INVESTMENT IS AT A 14-YEAR HIGH, notes LBO Wire. Venture investment in Europe “reached just over €3 billion across 355 transactions in the third quarter,” marking “the highest quarterly total since the second quarter of 2001, when investment stood at €3.3 billion across 774 deals.” Observes Ross Morrison, a principal at Adams Street Partners: “The European pipeline of companies with billion-dollar potential is fuller than it has ever been. For a long time” Europe was “starved of the technology companies of tomorrow and that has changed.” Meanwhile, European “venture fundraising remains low.” Some “13 venture capital funds raised a combined €853 million in the third quarter of 2015, a 58 percent fall in capital raised from the second quarter of 2015 and a 52 percent decrease in the number of funds.” Many industry professionals expect fundraising to rise, given the optimistic deal making environment.
THE SEC PLANS “PRIVATE EQUITY FUND RESTRUCTURING GUIDELINES,” writes Financial News. “To minimise harm to investors,” Mary Jo White, the head of the U.S. Securities and Exchange Commission, believes the PE industry “should have a strategy for steering funds that are being wound down.” “The issue is taking on urgency as a crop of funds raised during the PE boom of the last decade are reaching the end of their lifespan, and some are struggling to deliver returns to investors. As of the close of 2014, there was $548 billion in unrealized value locked up” in buyout and growth PE funds “launched between 2006 and 2008. Of those assets, 18 percent” – or $99 billion – is “managed by firms that never raised a fund after 2008.” These firms often have poor track records and over two-thirds of investors in a recent Palico survey believe fund restructurings – usually designed to lengthen the life of funds – represent a “conflict of interest” for managers.