– Secondary Closing Looks like Watershed for PE Liquidity
– Will More Top PE Firms Win Better Terms?
– Bill Gurley Sounds the VC Alarm
– Who’s the Best U.S. Presidential Candidate for PE?
– SEC Ties Fraud to Restructuring Weakness
– PE KeyTrends Quick Question Results
ARDIAN’S SECONDARY FUND CLOSING LOOKS LIKE A WATERSHED MOMENT for private equity liquidity. Ardian Secondaries Fund VII closed on a record $10.8 billion secondary platform in addition to a $3.2 billion pocket for primary investments. Much of the latter sum is likely to be used for so-called “stapled” deals, where the secondary purchase of a stake in a closed PE fund is accompanied by investment in a new fundraising by the same manager. In a claim widely repeated by the press, Ardian says “secondary funds now offer” private equity investors “similar liquidity levels” to what can be found in other asset classes. What’s indisputable is that secondaries have been transformed by record fundraising and transaction volumes in recent years, with sellers now using the market to proactively manage their PE exposure. “Higher prices” for funds “combined with strong returns” mean there are sellers today who would otherwise not exist, Ardian’s head of secondaries, Vincent Gombault, tells LBO Wire. He adds: “If you want to price a $1 billion portfolio at a discount of 20 percent, you will have no sellers.”
WILL MORE TOP PE FIRMS WIN BETTER TERMS? Bloomberg points out that a small number of very large, top-decile private equity firms have recently “demanded – and got – better terms from their backers.” In roughly half a dozen instances over the past year, managers have successfully pushed for greater compensation, won access to profits on a deal-by-deal basis, or scrapped a preferred rate of return for investors that’s typically set at 8 percent. This is happening at a time when the number of managers successfully raising capital has fallen and the amount of capital committed to PE has risen. Bloomberg concludes that investors “are writing bigger checks” to favored firms that are demanding better terms, while “lesser firms” languish. More money may be going to fewer vehicles, but it is far from clear that more than a small handful of managers will improve their terms in a market where a record 2,720 PE vehicles are seeking capital.
BILL GURLEY SOUNDS THE VENTURE CAPITAL ALARM. Celebrated startup investor Bill Gurley, general partner at Benchmark, has penned a 5,700-word blog that urges in-the-red entrepreneurs and their VC backers to cut costs or to go public. Gurley’s essay describes a “fundamental sea change in the investment community” that has seen startups accept what he calls “dirty term sheets” from a category of “sophisticated and opportunistic investors” that he labels “Sharks.” Their term sheets “are proposed investments where the majority of the economic gains for the investor come not from the headline valuation, but rather through a series of dirty terms that are hidden deep in the document. This allows the Shark to meet the valuation ‘ask’ of the entrepreneur and VC board member, all the while knowing” there will be “excellent returns, even at exits that are far below the cover valuation.” One example of “dirty terms” are dilutive share issues. Accepting such terms “is like starting the clock on a time bomb. Your only option is to hit the IPO window.” Meanwhile, Bloomberg notes “top tech investors” say the essay is “a must read.”.
WHO’S THE BEST U.S. PRESIDENTIAL CANDIDATE FOR PRIVATE EQUITY? Private Equity International has come up with a concise description of each candidate’s position on the taxation of carried interest, which is the fund manager’s share of capital gains. Hillary Clinton and Bernie Sanders would like to tax carried interest as ordinary income, or at a 39.6 percent rate, rather than the current 23.8 percent rate; Ted Cruz wants to cut the rate on capital gains to 10 percent; John Kasich would reduce capital gains to 15 percent; Donald Trump would slice the upper tax rate on ordinary income to 25 percent from the existing 39.6 percent, increasing current carry tax by 120 basis points. We hope that helps.
THE SEC TIES FRAUD TO RESTRUCTURING WEAKNESS. Private Equity International reports that the U.S. Securities and Exchange Commission’s co-head of private funds, Igor Rozenblit, has linked Andrew Caspersen’s effort to defraud investors out of $95 million to a lack of transparency in PE fund restructuring. Caspersen was arrested last month after pocketing $25 million from a charitable foundation that apparently believed it was investing in the recapitalization of a PE fund seeking liquidity for its current investors and a reset of management terms. Speaking at the SEC National Compliance Outreach seminar, Rozenblit said, “many people say, ‘this guy’s a bad guy, he would’ve done it in any other context, it’s not a restructuring issue. But these transactions are complicated and opaque, and that provided the perfect cover for” Caspersen. Rozenblit added that “restructuring is inherently conflicted because the general partner is trying to ‘breath new life into the business’ at the same time it looks out for itself as a fiduciary to the fund.” Don’t be surprised if the SEC seeks standardized disclosure in restructuring deals.