– College Endowments Look to Increase PE Allocations
– Options on PE Fees and Fund Terms Proliferate
– Core PE Gets a Boost with Carlyle Fundraising
– Is CVC the Biggest European-Focused PE Manager?
– SEC Broadens Focus to Zombie Funds
– PE KeyTrends Quick Question Results
COLLEGE ENDOWMENTS “EYE MORE PRIVATE EQUITY,” reports Bloomberg, following publication of the much awaited 2015 NACUBO-Commonfund Study of Endowments. Bloomberg notes that while the study shows “U.S. college endowments suffered their worst annual performance in three years (2.4 percent as of June 30), dragged down by tumultuous equity and bond markets,” venture capital and other private equity fund strategies produced returns of between 9.3 percent and 15.1 percent, beating all other asset classes. A second Bloomberg story notes that one third of college and university business officers “surveyed at an industry conference” following the study’s publication, say they’ll increase allocations to alternatives like PE. Only 9 percent “expect to decrease their stakes to alternatives.” According to NACUBO-Commonfund’s highly detailed press release, 812 U.S. colleges and universities participated in the study. That makes the study “the most comprehensive annual report on the investment management policies” of endowments in the U.S. – among the most experienced PE investors in the world.
MORE MANAGERS ARE OFFERING OPTIONS ON FUND TERMS AND FEES, notes Private Equity International. “Apax is the latest in a string of private equity firms to present its investors with options on fund terms,” with its Fund IX proposing a choice between deal-by-deal carry – profit sharing with the manager – and an alternative where carry doesn’t start until the preferred return is met on all fund investments. As a tool for incentivizing managers, both formulas have advantages and disadvantages, and choice is proving an effective response to questions about whether investors are getting a fair deal from PE. But don’t expect substantive change to the industry’s standard “2 and 20” percent annual fee and carry levels. The fundraising prospects of bad or mediocre managers don’t materially improve when they propose lower compensation. “The one thing” that all the funds offering options “have in common is that they either are or anticipate being oversubscribed,” PEI observes.
PRIVATE EQUITY INTERNATIONAL
“CORE” PE GETS A BOOST WITH CARLYLE FUNDRAISING. Bloomberg reports that Carlyle “has raised more than $3 billion for a new private equity vehicle that will invest in companies for up to twice as long as a conventional fund.” Carlyle’s move “parallels efforts” by other mega firms like Blackstone, CVC, KKR and TPG to move into so-called “core” PE vehicles that have lifespans of about 20 years. Like other examples, the Carlyle fund pursues “deals that don’t fit the mandate” of the group’s flagship vehicle. It will buy “businesses that need capital longer, to build themselves over an extended period, and family-owned companies that don’t want to go public” within just a few years, says senior Carlyle manager Eliot Merrill. “We used to have to pass on those deals – now we can lean in.” Though core PE vehicles charge less than classic funds, they increase assets under management, lifting overall PE firm compensation.
CVC IS THE BIGGEST FIRM IN EUROPE. Or is it? As Financial News writes in an article that ranks the ten largest PE investors, “estimating who or what are the biggest of their kind can be a difficult business, whether you’re a geographer trying to work out the world’s biggest islands (do you include continents?), a scientist trying to establish the world’s biggest birds (height or wingspan?), or a financial analyst calculating the scale of private equity houses.” Financial News’ response was to measure the biggest European-focused PE firm in three ways. And interestingly enough, CVC was the largest firm on each measure: by “dry powder,” or estimated available capital to spend on Europe-focused deals; by capital raised over the past 10 years for Europe-focused funds; and by aggregate value of European dealmaking in 2015. The only other manager to appear on all three top ten listings – ranking in each case between 5th place and 10th place – was Carlyle.
THE SEC BROADENS ITS FOCUS TO ZOMBIE FUNDS. That’s the implication of comments made at a Private Equity International conference by Igor Rozenblit, co-head of the U.S. Securities and Exchange Commission’s Private Funds Unit. In addition to the SEC’s much publicized scrutiny of investment manager conflicts of interest in fund restructurings, PEI reports Rozenblit saying that “fees and expenses in zombie situations are also on the radar.” “Zombie” is PE industry shorthand for managers unlikely to raise follow-on funds because of poor performance. In such situations “there are a number of techniques managers can use, when they have decided that they no longer value their LP relationships,” that may unfairly capture income, “including creating third party providers to charge fees to funds or clients,” Rozenblit says. According to industry pundits, the number of zombie managers is likely to rise over the next couple of years, as funds founded during the record fundraising boom of 2005-2008 reach term.