– 2016 Looks Like Another Big Year for Commitments
– Trends Support Significant Secondary Volume in 2016
– Profiting from Upheaval is the Story of PE (and Blackstone)
– Spin-Offs Re-Energize PE
– Tech Sector Seen as a Rare Bright Spot in Africa
– PE KeyTrends Quick Question Results
IT LOOKS LIKE 2016 WILL BE ANOTHER BIG YEAR FOR PE COMMITMENTS. That’s the implication of a Natixis survey of “660 senior executives of institutional investors worldwide,” covered by Pensions & Investments. The survey “cites 54 percent of respondents saying that equities and fixed income are too highly correlated,” while 66 percent say “increasing allocations to non-correlated assets such as private equity” is “an effective way of easing risk.” “The top concern of respondents, with 84 percent responding, in terms of managing risk, is the low-yield investing environment, followed by generating returns, 82 percent; and funding long-term liabilities, 72 percent – more than one response was accepted. Fifty-eight percent of respondents said over the long term active investments outperform passive investments, and 67 percent said economic factors over the next 12 months are more favorable for active managers.” The poll includes “representatives from corporate and public pension funds, sovereign wealth funds, insurance companies, and foundations and endowments” with more than $35 trillion in assets under management.
TRENDS SUPPORT SIGNIFICANT SECONDARY VOLUME, with many of the benefits to be captured by the industry’s biggest specialist funds. Ardian, one of the two largest buyers on the secondary market for private equity fund stakes – vying neck and neck with Lexington for the top spot – purchased an exceptionally large $940 million portfolio of PE funds from the Universities Superannuation Scheme, Real Deals reported last week. The sale “is an effective means of adapting our portfolio to reflect our shift towards greater direct investment,” says Geoffrey Geiger, USS’ private equity head. Secondary sales are likely to be increasingly driven by a desire to free up capital for direct investment, as private equity investors seek to boost exposure to attractive PE deals and lower overall fees. Meanwhile the large secondary specialists – who have seen assets under management grow to unprecedented levels – are taking a growing share of transactions. Those with $2 billion or more in AUM accounted for 80 percent of the volume last year, up from 75 percent in 2014, notes an Evercore survey.
THE STORY OF BLACKSTONE PROFITING FROM UPHEAVAL is the story of the private equity industry, or that’s the case made in an intriguing Wall Street Journal profile of the industry’s biggest fund manager. Some striking points: “Businesses Blackstone acquired or launched since its initial public offering, on the eve of the [2008 financial] crisis, account for about half of the assets it manages,” including “newer real-estate and corporate lending funds, as well as businesses [it] acquired;” and “capitalizing on turmoil” is a result of “a private equity model that locks up investor cash, typically for about 10 years, letting Blackstone ride investments through rough patches and providing cash to spend when others are selling.” The WSJ notes that “Blackstone and other PE firms are still much smaller than money managers like Fidelity Investments that cater to a broader swath of investors and manage trillions of dollars.” But it raises the question of whether this will always be the case.
PE FIRMS UNABLE TO RAISE NEW FUNDS ARE THE SOURCE OF NEW FIRMS. That simple point is made powerfully and credibly by Andrea Auerbach, head of global private fund research at Cambridge Associates, in a Privcap video. As many funds launched during the fundraising boom of 2005 to 2008 surpass or approach the industry’s standard 10-year term with the kind of mediocre performance record that precludes the raising of a follow-on vehicle, “we are seeing a wonderful bumper crop of talent finally coming loose from large platforms and really seeking…fresh capital for a fresh start,” says Auerbach. “The first-time fund and spin-off fundraising business is very much alive and well” and “for a lot of the larger fund families that may be unable to raise successive capital” the industry is seeing “one if not two spin-off firms” emerge, “re-energ[ing]” – and repopulating – PE.
“THE TECH SECTOR IS A RARE BRIGHT SPOT” IN AFRICA, as “economies come under pressure from falling prices for commodity exports and the slowdown in their biggest trading partner, China,” declares the Financial Times. While the commodity-based sectors of Africa languish, “venture capitalists are pouring hundreds of millions of dollars into startups as they look to tap into a second-wave of technological advances building on the rapid spread of mobile phones on the continent. From e-commerce to health and financial services, international investors are targeting fledgling companies in particular across Kenya, South Africa and Nigeria, three hotbeds for innovation.” Venture capital funding for the African tech sector amounted to $414 million in 2014 and is projected to rise 47 percent to $608 million by 2018.