Kalb, who is now an advisor to KIC, gave advice to private equity firms who would like to build a relationship with any sovereign fund.
The first recommendation to GPs is that they need scale. Large entities need to invest in a minimum $1 billion dollar fund. “Some [SWFs] are doing seed investments here and there but these are exceptions, and we’ll use funds of funds to help us with seed.”
Next is partnership, by which he means a GP helping its client to become a better investor.
“Having good returns just gets you in the game. If you help your clients, they will stay with you provided returns are good. The days of just saying `I’ve got good returns and you are lucky for the opportunity to put your money with me' are over.”
Having good returns just gets you in the game. If you help your clients, they will stay with you provided returns are good.
He also suggested providing co-investment opportunities for investors in large deals, side-by-side with the fund with no fees.
On the topic of fees, he said that the fee structure “should not be egregious. For LPs managing public money, fees get as much scrutiny as performance.”
GPs should also be able to demonstrate superior risk management systems.
“I used to be on the investment side and we looked at risk as the probability of making or losing money. But for giant public institutions, risk is measured differently. It’s not just the potential for investment loss, but also reputation, compliance and process risk. Guys who are risk managers for [SWFs] don’t care as much about performance.”
His final point was to invest in the business. Hire staff commensurate with asset size and invest in research and client service.
“What drives me crazy are the guys who have successive $2 billion or $4 billion private equity funds and they’ve got 20 people. If you want to have $20 billion AUM, you should have several hundred people involved in several offices. Otherwise it looks like you’re gathering assets — with a small amount of investment on your side — and taking money and just sticking it in your pocket. So if you want to be a big, professional company, be one and [public institutions] will support you.”