Robert Hamilton Kelly, Ali Raissi and Christian von Schimmelmann
The business of buying minority stakes in alternative asset managers isn’t new. Affiliated Managers Group, which has an interest in Pantheon and once owned a stake in Baring Private Equity Asia, has been buying interests in investment management firms since the 1990s.
Pennsylvania-based Rosemont Investment Group helped pioneer the strategy, having acquired at least 30 stakes in asset and wealth managers via dedicated funds since 2000.
What Goldman Sachs’ Petershill Partners unit has impressed the market – and its LPs – with is the model of buying stakes in alternatives managers via a dedicated fund with clear and innovative exit strategies. The business was established in 2007 and initially focused on acquiring stakes in liquid alternatives firms, including hedge funds.
In 2016 it picked up a minority interest in mid-market focused buyout shop Littlejohn & Co, with stakes in Accel-KKR, Riverstone Holdings, ArcLight Capital Partners and Clearlake Capital to follow. As we approach the end of 2022, Petershill has economic interests in 24 partner firms, including industry giants such as Permira.
Other firms have followed Petershill’s model, seeing the attraction of buying into the management fee streams and carried interest of alternative asset managers via a strategy that helps enable succession and expansion.
While many firms in this area see their business models as a type of permanent capital, Petershill, led by global co-heads and managing directors Ali Raissi, Robert Hamilton Kelly and Christian von Schimmelmann, has been focused on innovative ways to return capital to LPs from an early stage. In 2019, it securitised a portfolio of GP stakes held in its Petershill II fund, providing liquidity to its investors.
More innovation came in 2021 when it unveiled plans to float a portfolio of 19 stakes in managers on the London Stock Exchange in a process that would value the portfolio at around $5.5 billion. The listing provided an opportunity for LPs in Petershill’s Funds II and III to realise cash returns by reducing their positions at the time of the IPO, and which they could sell down further following a lock-up period – something no GP stakes manager had done until that point.
How would Petershill’s leaders like to shake up the industry over the coming years? According to the trio, democratising access to alternatives and having a greater focus on diversity and ESG issues is needed.
“As long-term investors in private equity, we have seen first-hand the need and the ability for managers to evolve in order to generate enduring investment performance,” says von Schimmelmann. “We have seen early signs that firms that are at the forefront of that evolution are able to outperform their peers, but we think as an industry we still have a long way to go.”
If asked to name the most prominent figure in Asia-Pacific private equity markets, most would point to Weijian Shan, co-founder, executive director and executive chairman of PAG. Shan has more than 28 years of experience in investment management and founded PAG’s private equity business in 2010, having previously spent 12 years at TPG Capital (formerly Newbridge). He led a number of landmark transactions for TPG/Newbridge in Asia, including the acquisitions of Korea First Bank and Shenzhen Development Bank in China.
“I originally planned to start my own fund rooted in and committed to Asia, but having subsequently come to know the founders of PAG and their investment platform, I decided instead to partner with them to grow a best-in-class private equity franchise,” Shan said in 2010.
PAG has since grown to become one of the largest private markets firms in Asia-Pacific. To date, the firm has more than $50 billion of assets under management, having raised three flagship buyout funds, two growth equity vehicles and three special situations funds, among others.
During his tenure, the Hong Kong-headquartered firm has become closely associated with China, and is considered by many investors to be one of the safest pairs of hands for those seeking exposure to the country. Today, PAG is one of the 100 largest firms in the asset class, and owns the likes of property services giant Cushman & Wakefield.
While Shan went on to become one of the most influential and high-profile figures in Asia-Pacific private equity, his route into the industry has been anything but ordinary. Born during China’s cultural revolution, Shan was sent for six years to work in the Gobi Desert. His experiences there are detailed in his 2019 memoir, Out of the Gobi: My Story of China and America.
EQT alumnus Jan Ståhlberg founded Trill Impact in 2019 with the ambition, he told affiliate title New Private Markets, of creating “a thought leader and force for positive change through impact investments, enabling like-minded investors to actively contribute to a better world and inspiring others to follow”.
Ståhlberg’s aim to garner the attention of like-minded investors was vindicated in 2021 when Trill’s inaugural impact mid-market buyout fund raised an impressive €900 million. It wasn’t just the size of its debut fund that made a splash, however. Under the leadership of its founder and managing partner, Trill is one of a handful of private markets GPs that have linked their fund economics to impact metrics.
While the fund has the 20 percent carried interest entitlement typical of a standard private equity fund, 10 percent of that carried interest could potentially be diverted to charitable organisations in the event that the manager fails to meet certain impact targets. Those targets are specific to each portfolio company and will be agreed at the investment stage.
Trill’s launch was considered to be a watershed development for this type of fund mechanism. The practice has been slowly gaining traction among emerging managers and impact specialists. In a sign that it could become more commonplace, it is also being explored by larger firms. In October 2021, for example, EQT announced carried interest would be linked to portfolio-level KPIs for its impact-driven EQT Future fund, which is targeting €4 billion.
Formerly at the US Federal Reserve
The chairman of the US Federal Reserve from 1979-87, Paul Volcker enjoyed a reputation as a market reformer. During his tenure as chairman of the Fed, he was widely credited as the driving force in curbing inflation in the US, which fell from around 11 percent in 1979 to below 3 percent in 1983. Following the 2008 financial crisis, he was appointed chair of the President’s Economic Recovery Advisory Board, where he made recommendations that would reshape the private equity market.
Volcker argued that speculative investment by banks into the private equity and venture capital spheres contributed in large part to the severity of the financial crisis, and that such investments were not in the best interests of their customers. To address this, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act included what has come to be known as the ‘Volcker Rule’. Implemented in 2015, it limited the amount of money that banks could invest in private equity, in order to reduce what he saw as systemic risk. The rule has since been loosened, including the removal of a 3 percent threshold limitation on holding closed funds, including private equity.
Volcker passed away in December 2019. Reacting to the news, the current chairman of the Fed, Jerome Powell, said that Volcker had left a “lasting legacy” on the US.
Formerly at Yale University
David Swensen, who sadly passed away in May 2021, was considered a superstar among LPs. The chief investment officer of Yale University’s endowment since 1985 until his passing, Swensen oversaw the endowment’s significant growth, from around $1.3 billion when he joined to more than $42 billion as of 30 June 2021. He also created what become known as the Yale Model of portfolio management.
The Yale Model, also known as the Endowment Model, as described in Swensen’s book Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, places emphasis on eschewing asset classes with low expected returns, such as commodities or fixed-income assets, in favour of alternative assets. This approach has been credited with kick-starting demand among endowments for private equity and venture capital investments, and for driving the industry forward as a whole.
Swensen was also an early mover among endowments in pushing for greater risk assessment and engagement on climate change, asking GPs in 2014 to avoid future investments into companies not making efforts to reduce carbon emissions.
Following his passing, Private Equity International reported on the reactions of several industry figures, who attested to his stature in the industry. “David wrote the book on how to run an institutional portfolio,” said Christopher Ailman, CIO of California State Teachers’ Retirement System, in a statement. “No one can match his legacy, results and contribution to our industry.”