If LPs are scrambling to get into the best funds, and getting squeezed every which way on fees, then how is the smart money accessing the asset class? The answer is with ever-closer alignment with the GP.
This year we have been hearing rumours about placement agents setting up seeding platforms for emerging managers. In recent weeks, these rumours have become fact.
The idea is straightforward: there is a cabal of adventurous LPs out there who want access to tomorrow’s star firms (with the risks and benefits associated with being an early backer). Placement agents know these investors and have access to the managers who want to meet them. They already assume some risk in taking on these mandates, so why shouldn’t they try to take on more of the rewards?
Advisory firm Sixpoint Partners has raised $200 million to back spin-outs of general partners. It is positioning itself as providing more than just capital – “a comprehensive seeding, fundraising and investor relations solution”, says the firm – and won’t compete directly with secondaries firms when it comes to buying the underlying assets. SP won’t retain a permanent stake in the spin-out, instead it “typically establishes a defined path to exit, thereby allowing the majority of the long-term value to remain with the GP”. Exits are a challenge for this type of investing and we look forward to learning more about the Sixpoint approach.
In the meantime, a nascent competitor of theirs may provide some clues as to the model. This week we took an in-depth look at Meteor5, a firm set up by four members of placement agent MVision Private Equity Advisors and Spanish PE veteran Javier Loizaga which is currently in fundraising mode. It intends to provide capital (between $8 million and $12 million a time) to experienced execs wanting to raise their own funds. Meteor5 then takes between 10 percent and 20 percent of both the management fee and the carried interest on the firm’s first two or three funds, and is therefore realised over time. It’s a 17-year fund and, according to confidential docs seen by Private Equity International, has some ambitious returns targets and opportunities for co-investment.
Both Sixpoint’s and Meteor5’s offerings fit into a wider trend of investors wanting to align themselves with the economics of the general partner. It is a trend most readily visible in the GP interests market, in which a handful of managers – Dyal Capital Partners, Goldman Sachs and Blackstone being the highest profile – buy stakes in mature managers.
Appetite for such strategies is currently voracious. According to a survey of LPs by Coller Capital, 17 percent of respondents have already invested in GP-interest vehicles, a figure that Remco Haaxman, partner at London-based Coller, described as “disproportionately large” given the naturally limited size of the market. The latest firm looking to capitalise on this is Investcorp, having recently hired Anthony Maniscalco (formerly co-head of a similar business unit within Credit Suisse).
Elsewhere, institutional investors are taking matters into their own hands. Capital Constellation, launched earlier this year, is a joint venture between Alaska Permanent Fund Corporation, RPMI Railpen and Public Institution for Social Security of Kuwait, and will provide cornerstone fund commitments and scaling advice to emerging managers in exchange for revenue-sharing arrangements with the new firms.
There have always been LPs who want more than just a standard fund commitment. It feels like their ranks are growing.
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