It seems appropriate, measured against the descent of the global economy, that limited partner liquidity constraints have deteriorated from “we can't invest as much as we would like to” (denominator effect) to “can we please invest less than we agreed to?” (over-commitment strategy). As we report in the following pages, over-commitment is a talking point: perhaps it may now even be hailed as private equity's latest buzz-phrase.
The issue came to the fore with the travails of SVG Capital, the London-listed funds of funds manager which invests primarily in funds managed by buyout house Permira. Following negotiations between the two firms, Permira agreed to release SVG from 40 percent of its agreed commitments to the Permira IV fund.
As it transpired, SVG was far from the only listed private equity vehicle to have to wrestle with this kind of issue – as Toby Mitchenall reports in the In Europe column on page 20, Candover Investments and others have had to confront similar difficulties. Nor is it necessarily the fault of these groups that they had such strategies in the first place. True, not all over-commitment strategies looked exactly alike and some may have been a little racier than others. Nonetheless, the reasons for implementing them appeared sound at the time: few could have predicted the set of circumstances within which their viability is now in shreds.
For all listed funds of funds, the renewed focus on the certainty of their capital commitments may have been uncomfortable. Arguably even more so were the strongly worded remarks about funds of funds attributed to acclaimed Yale endowment chief investment officer David Swensen (see page 50). In this month's cover story (see our series of features beginning on page 49), we explore whether the rationale for investing through funds of funds remains as compelling – or even more so – in today's environment.
This issue of PEI also features a fascinating comparison of the top ten global private equity firms in 1998 and 2008 respectively (see page 26). The survey reveals that, while it is possible to retain your place in the top ten over a decade, it is also possible to take a franchise from a position of strength and – most likely through a number of misjudged investment decisions – end up destroying it. Food for thought for today's GPs.
Enjoy the issue