Inside track

Two well-known LPs have launched new firms to help investors with two key concerns: building exposure to niche strategies and restructuring legacy private equity assets.

Just as general partners build investment vehicles around rising industry trends, limited partners are now striking out on their own to take advantage of changing LP attitudes.

Alexander Abell, a former principal with fund of funds BlackRock Private Equity Partners, left the firm earlier this year to launch Atlas Diligence. Atlas intends to work with institutional investors on building up specific sub-strategies within private equity, like emerging markets or distressed investing. Atlas’ target clients are those that are used to making their own investment decisions, but lack the resources to really explore specific strategies, Abell told Private Equity International.

For instance, some private equity investors are looking for more exposure to emerging markets like Brazil and India. They’ve certainly been committing more money to that end: fundraising for emerging markets could hit $40 billion for 2011, according to the Emerging Markets Private Equity Association, which would be a huge increase on the $23.5 billion raised in 2010. In essence, LPs are looking for the kind of growth that is hard to find in the developed economies of the US and Europe. And by moving away from generalist buyout funds, they can capture more diversity in their portfolios. 

Then there’s Joncarlo Mark, a former senior private equity investment official with the California Public Employees’ Retirement System, who in September launched Upwelling Capital. His new firm will work with institutional investors to help with restructuring legacy assets.

A particular concern for many LPs at the moment is around GPs that are not likely to raise new funds in the future. These managers are de facto less incentivised to work hard and find the best possible outcome for investments in older portfolios, especially if they are not expecting to earn carry in under-performing funds.

What’s more, many institutions do not have the resources to dedicate a team or even a specific employee to monitoring legacy portfolios that are not being exited. Mark believes the amount of institutions burdened by legacy assets, without the means to sort them out, presents a good opportunity for his new venture.

“People are trying to figure out what to do with all the relationships, funds, co-investments they have,” Mark says. “If you don’t do anything, you risk continued erosion of value, illiquidity and misalignment of interests, particularly if the manager is not in the money. If you sell, you risk discounts on the secondary market.”

Having been in the same position as their target market until very recently, both Abell and Mark should be better placed to exploit these trends commercially than most.