CalSTRS’ Ailman: ‘Large funds will bifurcate the market’

California State Teachers’ Retirement System‘s chief investment officer Chris Ailman sat down with Private Equity International to discuss his views on industry game-changers such as SoftBank’s mammoth Vision Fund – the world’s biggest technology fund – which is nearing a $100 billion final close.

As the latest PEI 300 ranking shows, private equity firms are in a heated race for large fundraises. Among them are Warburg Pincus, targeting $13.5 billion for its 13th flagship fund and The Carlyle Group, which is aiming for a $15 billion final close for its seventh US buyout fund.

Ailman, who leads the investment division at the $224.8 billion pension, says the sheer size of mega-funds will be an “interesting challenge”. Large funds open opportunities for mid-market buyouts and make them competitors with corporate M&A, he adds.

Transcript:

“You know I think the disruptors in private equity are going to change…maybe not turn the entire industry up on its head… but they will have a huge impact and change the way the industry operates.

The huge size of these funds lends themselves more to buying and holding a company, and less to the speed of turnover. The sheer size, the sheer bite-size to come in and actually move the needle for these funds is going to be a very interesting challenge. It really actually makes them very much equal competitors with corporate M&A. And so, we’ll have to see what kinds of companies they purchase, at what kinds of prices.

I think it is going to bifurcate the market that many of the largest funds are up at huge dollar size, and then maybe we are going to see the traditional buyouts that are raising $10 billion to $20 billion in a different size. But I think that also opens up opportunities for more middle market buyouts, which I know in our case we have taken a look at. [These] people that are more regional in nature that will then buy multiple companies and build those up and feed those companies up into the larger buyout funds.

So, the one thing about the private equity industry is that it is constantly evolving, constantly changing. I remember just 20 years ago some private equity GPs got up on a stage and were all excited to announce we are now an industry. Well it is definitely an asset class. It is not an alternative asset class. As [Japan’s Government Pension Investment Fund chief investment officer] Hiro Mizuno said, it’s just part of the asset allocation for most funds. But at the end, the industry is again going to change as it matures. And as these firms become more established now we are going to see these mega, mega firms come into it. It will be interesting to see how it evolves over the next five to 10 years.”