Some fundraising news for readers to kick off the day: mid-market software investor Accel-KKR has taken just six months to raise its latest flagship, amassing almost $1 billion more than its target. The Menlo Park-headquartered firm has collected $5.3 billion across two vehicles, according to PEI data and a spokesperson for the firm. This comprises $4.4 billion for Accel-KKR Capital Partners VII, its latest flagship vehicle, beating its $3.5 billion target, and $920 million for Emerging Buyouts Partners II, its small-cap focused fund.
Accel-KKR has been upping its fundraising hauls in recent years. The firm jumped 33 places in last year’s PEI 300 ranking to 66 – ahead of Oaktree Capital Management and fellow Menlo Park local Sequoia Capital – having amassed $9.9 billion across the preceding five year period. The prior year, the firm ranked 144th.
An exit slowdown is creating headaches for asset allocators, our colleagues at Buyouts report (registration required). In a presentation by consultant Abbott Capital as part of Ventura County Employees’ Retirement Association’s March board meeting, the pension system reported a negative cashflow of $108 million from its PE portfolio for last year, driven by a 51 percent reduction in distributions year-on-year.
To tackle the effects of this exit lull, Ventura has approved a pacing plan from Abbott that would see it reduce its PE commitments to $235 million this year and $225 million in 2024. The system committed $283 million in 2022, above its $275 million target. With its current allocation falling just below its target of 18 percent, Abbott believes that a pace reduction will allow the system to keep operating near this level. Ventura aims to once again extend its reach to $475 million in commitments by 2030.
Tackling portfolio company emissions could help GPs on the fundraising trail. That’s according to a survey carried out by consultancy Simon-Kucher & Partners, which found that 78 percent of European PE professionals believe reducing their portfolio’s carbon emissions has had a positive impact on overall fundraising performance.
Of the 132 participants, 93 percent said emission-reduction initiatives increased exit valuations, and 68 percent said they had a positive influence on multiple arbitrage. Two-thirds said it improves profitability.
The general rule is that the bigger the GP, the greater its level of climate impact engagement is, the report noted. Forty percent of players with AUM of €10 billion or above are very engaged, with another 50 percent indicating they were moderately engaged. As an exception to the rule, half of firms with less than €500 million also describe themselves as ‘very engaged’. When it comes to implementation, 98 percent of respondents expect to increase their focus on climate over the next two years, with more than half expecting to do so strongly.
Relatively few PE firms have made explicit net-zero commitments, and managers are under growing pressure from their LPs to measure and report emissions at portfolio companies – a dynamic Private Equity International explored in our latest Responsible Investment Report.
A taxing issue
A new think piece from Invest Europe, the association that represents PE and VC in Europe, examines the issue of tax neutrality in private markets and what can be done to streamline the process of investors injecting capital into the EU. Tax neutrality is the concept that PE and VC investors should be taxed as if they hold the underlying assets directly, and therefore should only be taxed once – on their gains and income when they make taxable profits from a fund.
Written by Richard Thomson, a partner in EY’s private business funds team and a member of the Invest Europe tax committee, the article explains how confusion often arises due to the nature of PE investing. “Funds are not simply a single company in which investors invest, which can easily lead to double taxation. In parallel, different EU jurisdictions have their own views on which entities are transparent for tax purposes,” Thomson writes. He argues that EU and national governments need to create a regulatory framework that maximises the flow of investment capital to ensure tax neutrality is achieved. Here’s a summary of his suggestions:
- Pooling vehicles that minimise tax on gains and include the ability to distribute capital gains need to be introduced in the EU
- ATAD III – the EU directive designed to prevent the misuse of shell entities for improper tax purposes – must be implemented properly and have appropriate carve-outs for entities beneath regulated EU funds. This may include allowing PE/VC funds to use special purpose vehicles beneath a regulated entity.
- An EU-wide system where withheld taxes or other capital gains taxes are not deducted from the source when it can be demonstrated that the ultimate beneficial owner can benefit from their respective treaty or other exemption should be introduced.
- Standardised EU guidance on transparency when trading and investing should also be introduced.
Today’s letter was prepared by Alex Lynn with Adam Le, Helen de Beer and Madeleine Farman