March 23, 2018
– PE Funds are Getting Ready for Economic Downturn
– As Market Fears Grow, Offbeat Fund Strategies Bloom
– Long-Hold PE Funds Can Double Returns
– Private Equity’s Path to Control is Getting Easier in Asia
– Jillian Manus Discusses Sexual Harassment in VC
– PE KeyTrends Quick Question Results
PE FUNDS ARE GETTING READY FOR AN ECONOMIC DOWNTURN, according to Reuters, reporting on comments made at the recent SuperReturn conference in Berlin, the industry’s largest annual gathering in Europe. “Comparisons to 2007’s pre-crisis conditions are becoming more common and industry figures are debating whether today’s robust conditions constitute a bubble, as purchase prices rise, jumbo buyouts proliferate and deal terms become more aggressive,” writes Reuters. In this context, fund managers are increasingly seeking non-cyclical investments “that they can take through a recession,” says Gregor Bohm, co-head of Carlyle’s European buyout business. He adds that sensible fund managers are selling businesses that “you don’t want to hold through a recession.” In any event, PE is better prepared for a downturn than it has ever been, thanks to the new prevalence of flexible ‘cov-lite’ debt, which makes it difficult for bankers to declare PE-owned firms in default.
“AS MARKET FEARS GROW, OFFBEAT FUND STRATEGIES BLOOM,” writes WSJ Pro, reporting on the rising popularity of such vehicles. With public markets “becoming choppy,” limited partners “are committing more capital than ever to strategies such as litigation financing, entertainment and pharmaceutical royalties, and secondhand life-insurance policies,” notes WSJ Pro. The popularity of offbeat private equity strategies is explained by their exceptionally weak correlation with public market performance. And the types of limited partners considering investing in these funds is also expanding. In addition to the family offices and endowments that have long gravitated to the offbeat, “a greater number of pension funds and other more traditionally minded institutions are starting to take a look.” Interestingly, some 40 percent of the funds in Palico’s marketplace focus on specialities, covering everything from litigation finance to water technology, with the vast majority intended to show little correlation with the direction of the macro economy.
LONG-HOLD PE FUNDS CAN DOUBLE THE RETURNS OF STANDARD FUNDS, proclaims a Private Equity International story, citing research from Bain & Company. Bain’s research “modelled costs and returns for a theoretical long-hold fund” selling an investment at the end of 24 years against the same for a buyout firm selling four successive companies over the identical period. Notes PEI: “Long-hold vehicles benefit from lower transaction costs due to reduced deal activity, deferred taxation of capital gains and greater flexibility around the timing of an exit, which all help outperformance.” Committing to a series of PE funds, each with a standard ten-year investment life, also involves fallow periods where capital is not yet invested, reducing returns compared to a long-hold fund.
PRIVATE EQUITY’S PATH TO CONTROL IS GETTING EASIER IN ASIA, observes Reuters’ Breakingviews, citing another Bain & Company research report. “Half of recent minority deals struck in Asia included path-to-control provisions, up from about a third” historically, writes Reuters’ Breakingviews. “And though the number of full takeovers in the area dipped last year from a record in 2016, they grew noticeably bigger. The average LBO clocked in at over $500 million, more than double the previous annual figure.” Control investments – along with Asia’s generally high growth rates – may make it easier to accept the region’s exceptionally high purchase prices for PE-backed acquisitions, which dipped slightly to an average of 14 times cash flow last year.
JILLIAN MANUS DISCUSSES SEXUAL HARASSMENT IN THE VC INDUSTRY. A managing partner at Structure Capital and a judge on the The Pitch podcast (similar to Shark Tank but “less predatory,” according to Manus), she talks about the nature and prevalence of sexual harassment in Silicon Valley, her own period of homelessness and the biggest mistakes that early-stage founders make in this intriguing Fortune magazine Q&A.