Whether you agreed or disagreed with them – and as ever we had subscribers who did both in 2017 – our Friday Letters sought to provide fresh insight into the day’s trends and news.
Why this isn’t 2007
At the start of the year, references to the re-emergence of pre-crisis excessive behaviour proliferated. Surely the warning signs were all pointing to a return to the bad old days? PEI thought it was worth examining how different the market of 2017 was from a decade before.
“Let’s take a breath and consider two good reasons why this is not 2007. First is total deal value. In 2007 the total value of global buyout activity was $683 billion, a shade lower than in 2006’s $685 billion total. Last year the equivalent figure was just $257 billion, and the annual total has not exceeded $300 billion in any year since the crisis.”
The dividing lines of fund finance
The proliferation of subscription credit facilities in private equity was a defining topic of debate for the industry in 2017. Our February letter “Money for nothing” prompted reader responses that encouraged us to investigate the issue in greater depth. Having explored it throughout the year, PEI concluded in November that this was an issue as divisive among limited partners as any we’ve covered during our 17 years of publishing.
“Managers who have their clients’ best interests at heart will need to tread carefully to not upset anybody. Says an industry veteran in Hong Kong: ‘We haven’t used any facilities at all. Half my investors tell me to keep it this way. The other half aren’t happy.’ Now there’s a dilemma. When what’s at stake is the goodwill of the investor base, GPs know they have their work cut out.”
Blackstone’s big numbers
Rarely is the industry’s largest manager far from the headlines, but in May Blackstone was on the front pages for securing a whopping $20 billion commitment from Saudi Arabia’s Public Investment Fund which, with further fundraising, was to grow into a $40 billion infrastructure fund. PEI noted that another, lower profile, deal the firm had struck that week – the acquisition of annuity provider Fidelity & Guaranty Life – would have a bigger impact.
“The FGL deal brings the firm an alternative asset manager’s holy grail: ready access to a sizeable chunk of quasi-permanent capital – up to $28 billion of it – to invest across all its platforms while earning management fees and carry from those commitments.”
In April Australian superannuation fund First Super said it would stop making new private equity commitments, and may even wind down its entire programme, pending the result of a review of its portfolio. This was prompted by revelations of “poor labour practices” at certain portfolio companies. The fund’s very public reassessment of its private equity programme was “unlikely to spark a revolution”, PEI concluded, but did raise some questions, such as whether other LPs have a fiduciary duty to take a similar stance.
“One thing can be said for sure; the episode serves as another reminder to both LPs and GPs – if one is needed in 2017 – that environmental, social and governance issues have a tangible financial significance.”
Less does not turn out to be more for CalPERS
In November we learned that the California Public Employees’ Retirement System’s drive to reduce its number of GP relationships to benefit from efficiency gains and negotiate favourable terms had not yielded the results it had hoped for. Complexity and monitoring intensity haven’t diminished and CalPERS hasn’t benefited from significant fee reductions.
“This is not a sign, by any means, that the trend for concentration of private equity portfolios has failed. Rather, it’s a realisation that CalPERS’ approach has not let it fully milk these fewer but deeper relationships. For other big US public pensions, there is no reason for it not to roll on.”
Technology, technology everywhere
Huge quantities of capital being raised for technology-focused funds got us wondering whether the ‘too much money, too few deals’ maxim would apply more readily than it already does to technology-focused funds. Two factors were worth considering, PEI noted. First was the shrinking public markets; “the public market investor’s loss is the private equity investor’s gain when it comes to increasingly sizeable dealflow.” Second was the sheer scope of target companies that fall into a tech funds remit.
“To describe ‘technology’ as a sector is, at best, to capture a very broad church of investment strategies and, at worst, to mislabel it as a sector altogether.”
Norway GPFG: Better late than never
In September Norway’s giant Government Pension Fund Global hinted that it was now too big and too late to think about investing in alternatives. We disagreed.
“This does not seem rational. Yes, it would and should take a long time to implement a private equity strategy of this scale responsibly, but as a fund whose mission is to safeguard and grow assets over generations, it has time on its side.”
Fund restructuring: a source of friction
As a number of high profile firms orchestrated secondaries processes on ageing funds, PEI examined the “frictional” costs to LPs of being forced to roll over into a new vehicle.
“For an LP with a small investment staff – as many have – being asked to roll over into a new fund is not as simple as ticking a box: there are frictional costs. They may not be measured in millions, but they could be avoided altogether simply by sticking to the original fund plan.”
Impact investing: it’s complicated
A debate among board members of the New Mexico State Investment Council in June showed that – for those responsible for public money – investing with purpose may not be the simple ‘win-win’ it first seems.
“While every public body will have its own political sensitivities that need to be taken into account, it’s clear impact investment does come with political implications – not least the argument that the pension plan should be looking first and foremost to make social and environmental impact in its own state.”
Waving goodbye to the entrepreneurs
As two of the industry’s largest and most influential groups – KKR and Carlyle – announced plans to shift leadership away from the founders to the next generation, in October PEI lamented the institutionalisation of private equity.
“These succession events are, of course, inevitable and necessary. From an industry observer’s standpoint, though, they are also tinged with regret. Rubenstein, in particular, has been a source of colour and column inches since he first graced the pages of PEI in our first edition. Who could forget the holiday rap he recorded for investors back in 2014? (Try as they might.)”