Investing in equity has become an expensive business: too expensive, it seems for Apax Global Alpha, the listed investment vehicle associated with Apax Partners.
AGA said this week that within the liquid portion of its portfolio, what it describes as “derived investments”, public equity valuations had reached such a level that it prefers the risk-return profile of debt in today’s market.
Noteworthy within AGA’s half-year results were both the scale of distributions it received from exits in its private equity holdings in H1 and the relative slowdown in investments. It expects €112 million in proceeds from three sizeable exits in the first half, more than twice last year’s H1 number.
Investment, on the other hand, is slowing: €25.3 million of AGA’s capital was committed to five new investments (“committed” rather than “invested”, because of Apax funds’ use of credit facilities), down from €39.7 million for the same period last year.
AGA’s experience is replicated across the wider LP universe. Private equity distributions have outweighed capital calls for the past five years, with the divergence increasing sharply since the first quarter of 2016, according to data from private equity software provider eFront released this week.
It is questionable whether this is something investors should be worried about at this point in the cycle.
Investors may be irked by the cash management and fee-related issues it raises. Having committed substantial amounts to funds that are not drawing capital means investors have to temporarily deploy PE allocations into liquid strategies. The growing proliferation of credit facilities exacerbates this.
There is also the question of fees on committed capital. When it comes to management fees, not all funds start the clock ticking at the same time. In the more LP-friendly version, they are activated on the first investment. At the other end of the spectrum they can kick in from as early as the first close. In the latter, one would forgive LPs growing impatient at an extended period of inactivity.
One area where the slowdown has had an effect is in how LPs are conducting investment due diligence. Angela Willetts, co-head of private equity at Capital Dynamics and a veteran fund investor, says her team has upped the focus on a GP’s deal pipeline during investment due diligence. For new managers, she wants to see genuine evidence that this money will be put to work.
Overall, however, LPs will not fret too much about a slowdown in activity at this point in the cycle. “It is about balance,” Willetts says. “If managers are keeping an eye on pricing relative to public markets and other M&A transactions, and decide to slow down on this basis, then I am more comfortable with a slower investment pace.”
It looks like GPs will be allowed to be selective for now.
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