August 14, 2017
– A Private Secondary Market Blossoms for Startups
– PE Managers Increasingly Sell All or Parts of Their Firms
– The 12 Most Sought-After PE Funds of the Secondary Market
– LPs are Willing to Compromise on Returns
– The Long-Term Future of Private Equity
– PE KeyTrends Quick Question Results
A PRIVATE SECONDARY MARKET FOR STARTUPS BLOSSOMS, at least that’s the implication of recent press stories. Bloomberg’s coverage of SoftBank and its Vision Fund’s $4.4 billion investment in privately held WeWork, the co-working startup valued at some $20 billion, notes that much of the stake will come from existing shareholders and that the deal “mirrors” another potential Softbank deal with Uber. There, Softbank is negotiating to buy as much as $12 billion from the ride hailing giant’s shareholders. Meanwhile, the Boston Globe notes that after a decade of raising money from venture capitalists, privately-held software testing startup Applause App Quality is eschewing an initial public offering in favor of a private sale to tech fund Vista Equity Partners. Staying private while cashing out investors is an increasingly viable means of increasing corporate value while avoiding the short-termism of public markets.
PE MANAGERS ARE INCREASINGLY SELLING ALL OR PART OF THEIR FIRMS, reports the Wall Street Journal. As investors look to invest more with fewer managers in order to maximize their private equity exposure while keeping fund portfolios manageable, general partners are seeking capital to branch into new PE strategies, creating one-stop shops for limited partners. At the same time, some of the world’s largest public market managers – including BlackRock, Schroders and Aberdeen Standard – are buying PE managers as a means of combating falling profit margins tied to the popularity of exchange-traded funds and other low-fee products. Explaining the appeal of acquiring GPs, Edward Bonham Carter, Vice Chairman of stock investor Jupiter Fund Management, notes that PE managers bring in “four, five [or] six times” the fees that “a more conventional” manager earns. Given this, consolidation and monetization of GP stakes should keep on rising.
“THE 12 MOST SOUGHT-AFTER PE FUNDS OF THE SECONDARY MARKET” – that’s the title of Real Deals’ story on Palico’s survey of LPs who successfully purchased stakes in private equity funds on the secondary market over the six months through August 14. The survey shows strong pricing, with the typical transaction valued at 99.7 percent of the most recently reported net asset value. Moreover, 12 of the 25 funds (the 12 referenced by Real Deals) for which Palico has transaction data went for premiums, with the average sale price 6.8 percent above net asset value. For funds going for par or less, the average transaction was 93 percent of net asset value. The typical fund was nine years-old when sold. The most highly valued vehicle sold as a secondary was Clayton Dubilier & Rice VIII, a fund that began investing in 2009 and which sold at a 15 percent premium to net asset value.
“LPs WILL COMPROMISE ON RETURNS TO PUT MONEY TO WORK” – that’s the title of Private Equity International’s story on a comprehensive Palico survey of limited partners and general partners covering private equity fundraising, performance and secondaries. The survey covers results from the “KeyTrends Quick Questions” that feature in the report you’re reading (we encourage you to answer today’s questions!). The survey questions generated an average of 72 responses each from a broad mix of general partners and limited partners from around the world between January and July 2017. Among the key findings: 47 percent of LPs say they’ll compromise on potential performance if they can put an “exceptional” amount of money to work; 79 percent of LPs and GPs believe relative allocations to PE are rising; 60 percent of LPs and GPs call fundraising competition “exceptionally intense;” and 65 percent of LPs and GPs say fund restructurings are healthy.
CONTEMPLATING THE LONG-TERM EVOLUTION OF PRIVATE EQUITY? If yes, reading this EY report can offer valuable context. Titled “How can Private Equity Transform into Positive Equity?,” the report frames “a vision of the future of PE based on insights from industry founders, leaders and visionaries,” including the creators of mega firms Carlyle, Blackstone and TPG – respectively David Rubenstein, Stephen Schwarzman and David Bonderman. Others include Warburg Pincus CEO Chip Kaye, Silver Lake co-founder Glenn Hutchins, Shane Feeney, head of PE at the Canadian Pension Plan Investment Board, and Harvard PE guru Josh Lerner. Their views are briefly summarized in a Private Equity International article: Hutchins expects “slow motion shakeout” among GPs; Schwarzman predicts an investor bonanza spurred by U.S. deregulation; and Bonderman sees a great wave of GP diversification, spurred by limited partners seeking one-stop shopping and the public listing of private equity firms.