LP appetite: Institutions are backing non-traditional PE products

Whether it’s crossing asset types or expanding into a new country or region, GPs’ push to increase their product offerings is gathering steam.

Limited partners continue to deepen relationships with their general partners and with that comes a willingness to back managers’ expansions into new strategies and product offerings.

Whether it’s crossing asset types or expanding into a new country or region, GPs’ push to increase their product offerings is gathering steam; with a record $2 trillion of dry powder as of December 2018, according to Bain & Company, GPs are seeking value wherever they can find it.

Over half of LPs polled in Coller Capital’s Global Private Equity Barometer for summer 2019 said they are more willing to back their GPs’ expansion compared with five years ago.

The reason is clear: almost all said when they backed new products or strategies from their existing managers, investment returns generally met or exceeded expectations.

Big managers are branching out. Private equity giant Warburg Pincus launched its first dedicated China fund in 2016, raising $2 billion. The fund is showing a 1.2x investment multiple and 27.8 percent net internal rate of return, according to Washington State Investment Board data as of end-June 2018. Less than three years later, the firm is back with a second offering, this time with a $4.3 billion target. Warburg, which invests in five key sectors including energy, healthcare and TMT, also raised $2.3 billion against a $1.6 billion target for its first financial services fund in December 2017.

CVC Capital Partners, which pioneered long-duration funds, has exceeded its €4 billion target for its second Strategic Opportunities Fund and is aiming for a 12-14 percent internal rate of return. Its predecessor vehicle held a €3.9 billion final close in 2016.

Managers are also adding strategies like impact investing to their products. Among those that have joined the arena recently are KKR, Blackstone and Hamilton Lane.

Move and flex

A London-based managing director of a fund of funds notes the popularity of new strategies is also down to managers understanding the dynamics of the market. In Europe, mid-market firm IK Investment Partners has raised close to €800 million across two small-cap funds since it launched the strategy in 2015. It expanded the mandate last year to target more investments in the Benelux region.

“LPs are focused on building these relationships and this is perhaps why they are more receptive to GPs coming up with new products,” David Jolly, a partner with Coller Capital, tells Private Equity International.

LPs in Asia-Pacific are the most open to backing GPs’ innovative moves, with close to 80 percent of LPs in the region saying they are willing to commit capital to new product offerings, the Coller survey found.

According to Jolly, Asia-based LPs generally have younger private equity programmes and may have more gaps to fill in terms of particular strategies or funds, which could explain their receptiveness.

New strategies show flexibility, depth and sophistication, but GPs are also aware the robust fundraising environment won’t last forever, the London-based MD warns. “They could also be accelerating fundraising pacing and adding new strategies before the impending downturn.”

Not all LPs are big fans of GPs expanding their product ranges.

“In many cases we see these GPs acquiring external asset management teams which they bring under their brand and try raising more and more assets at high fixed rates plus performance fee,” Jos van Gisbergen, senior portfolio manager at Dutch asset manager Achmea, tells PEI.

“Over time these managers are becoming asset-gatherers where the alignment with LPs is less and less prominent as it should be.”

Furthermore, there are risks of conflicts, where a GP is involved at several levels – both debt and equity – and within a company, he adds.