Friday Letter Sight for sore eyes

The emergence of new pools of capital is a welcome signal for private equity fund managers, even if 'new' LPs aren't always looking to commit to traditional PE funds.  

Private equity fundraising has been painfully slow for some time now, with last year's figures off 65 percent from the prior year. Limited partners today are committing capital more selectively, in smaller amounts and often contingent upon more friendly terms. It's subsequently become an accepted tenet that fund sizes will shrink – perhaps dramatically – from the high levels they reached in the boom cycle. On top of this, fundraising has become protracted and more expensive.

Against this backdrop, the promise of new pools of capital for private equity investment is a particularly refreshing development.

For example, the Pension Protection Fund in the UK, which rescues the pensions of troubled companies, recently created a 20 percent allocation to alternatives, including private equity, property, infrastructure and absolute return funds.

The Korea Investment Corporation, which is the South Korean government’s vehicle for overseas investment, also wants to increase its exposure to private equity over the next few years; its CEO, Chin Young-wook, told the Financial Times this week the fund plans to invest up to 20 percent of its $30 billion in assets in private equity and hedge funds in the “near to medium term”, having only entered the asset class last year with a 1.7 percent allocation. Institutional investors from other countries, including Colombia and Norway, are also mulling private equity programmes.

Market sources caution, however, that not all new entrants to the asset class are expected to follow the traditional LP-GP model; some – particularly sovereign funds, sources say – will explore other structures, from managed accounts to pledge funds. Sang Joon Kim, head of investment strategy at KIC, said in an interview last year, for example, that KIC intended to tread into the asset class conservatively as it worked out the best structure for its private equity programme. The sovereign fund has so far made both traditional fund commitments, recently committing $100 million to an IFC fund, as well as created separate accounts, such as the secondary-focused mandate it awarded Partners Group last year.

While the relationships forged by some new LPs may differ from the traditional LP-GP fund model, that these heavyweight investors increasingly consider private equity a key component of their investment strategy gives private equity fund managers an important endorsement, and perhaps even some momentum on the fundraising trail with other LPs. Even more important, is that in many cases these new pools of capital – and their appetite for private equity – are usually not as affected by the short-term liquidity constraints that have beleaguered other institutional investors. As such, they can be powerful partners for GPs.

Establishing new relationships with LPs will no doubt remain challenging in this difficult market cycle, but smart, hard-working managers producing solid returns will find continued support for their efforts – even if it comes in increasingly varied forms.