Side Letter: Ailman’s PE conviction; USS’s RI boss loss; KIAL’s FoF pause

CalSTRS CIO Christopher Ailman remains bullish on private equity despite its flaws. Plus: An Indian GP has paused efforts to raise a fund of funds; and UK pension giant USS is saying goodbye to a pioneer of responsible investing. Here’s today's brief, for our valued subscribers only.

Just happened

CalSTRS’ conviction
California State Teachers’ Retirement System‘s chief investment officer, Christopher Ailman, remains a staunch believer in private equity as a “big alpha driver” for pension portfolios, despite the changing market climate. “Not everything in that industry is perfect or well done but many of the long-term institutions… seeing public companies going private, a big part of that is arbitrage of thinking short term versus being able to think long term… The ability to invest in a company and redeploy earnings into it becomes a powerful generator of returns over time,” Ailman told Money Maze podcast last week.

Ailman also expressed a desire to raise CalSTRS’ allocation to venture capital, noting, however, that its size would likely prevent such a move. “We just don’t fit their world and vice versa,” he said. “They want small investments; they want to diversify LPs; and they want private LPs who are very secretive and quiet just like they are, while I’m public [and] everything I do is in the press.”

Asked what advice he would give to a 20-year-old investment professional, Ailman recommended developing an awareness of the three biggest mega-trends impacting the world: climate change, demographics and geopolitics, in that order. “Travel the world, understand history better,” he said. “The relationship between China and the US in the next 30 years is going to be absolutely profound.”

Kotak’s pause
India’s Kotak Investment Advisors Limited has paused efforts to raise a domestic fund of funds in a bid to capture opportunities relating to a market correction. Launched in 2022, India Alternate Allocation Fund was intended to back PE and VC funds from early stage through to late stage. “In PE/VC investment, vintage of the fund, ie the time to start deploying capital, is very important,” a KIAL spokesperson told Side Letter. “Presently, valuations are correcting, hence it is prudent for the FoF to defer investing and catch a better vintage of funds. With this view, we have taken the call to postpone the PE/VC FoF.”

KIAL’s move was first reported by India’s Live Mint last week. It comes amid a successful first close for its Strategic Situations Fund II last month, Side Letter noted at the time.

According to Bain & Co’s India Venture Capital Report 2023, global macro headwinds saw Indian deal values fall 70 percent in the second half of 2022, compared with the equivalent period a year prior. As investors grew cautious, average VC deal size compressed from $25 million to $16 million. The market is, however, expected to benefit from China-plus-one tailwinds as international investors shift focus away from China.

Brae-ving the elements
This year’s challenging fundraising environment hasn’t stopped all new funds getting over the line. Case in point: Braemont Capital, a US growth firm launched in 2021 by RedBird Capital Partners veteran Robert Covington, has closed its debut fund on $525 million, per a Monday statement. Braemont Partners I launched in 2021 with a $500 million target.

Closing such a fund at a time like this is no mean feat. As our colleagues at Buyouts found in their 2022 Buyouts Emerging Manager Survey, conducted by Gen II Fund Services, almost two-thirds of respondents agreed or strongly agreed that LPs are hesitant about backing first-timers. Nevertheless,  a Probitas Partners survey this year found that 75 percent of investors are interested in spin-outs, where teams have accumulated significant prior experience.

This may have been key for Braemont, Buyouts noted in February (registration required). Covington was with RedBird for seven years, most recently as a partner investing in business and financial services, communications infrastructure and tech-related companies. Before, he was with Stephens Group and SSM Partners and founded a start-up called Firstdoor.

They did the math

Seeking cover
PE managers are increasingly looking to insure their deal-making.
A total of 9,178 transactions used M&A finance in 2022, not far off 2021’s record setting volumes when 9,751 transactions did so, according to a report from global broker BMS, which noted there has been approximately 40 percent growth in M&A insurance products being purchased in the past 24 months. M&A insurance covers financial losses arising from breaches of representations and warranties given by sellers in a transaction. Common breaches include errors in historical financial statements or past non-compliance of certain regulations.

The M&A insurance market has had a subdued start to 2023 compared with deal activity levels seen over the past two years, Tan Pawar, head of PE and M&A at BMS, said in a statement. “We have not seen a decrease in enquiries from companies eager to obtain M&A insurance. With market conditions expected to stabilise, we should see a resurgence in deal activity by the end of Q2 and into the second half of 2023.”


USS: Russell-ing up a new head

David Russell, head of responsible investment at USS Investment Management – a subsidiary of the Universities Superannuation Scheme – will step down at the end of June, our colleagues at Responsible Investor report (registration required). Russell has been an influential voice for ESG during his 22 years at the £90.8 billion ($113 billion; €103 billion) UK pension fund manager.

Russell is a former board member of the Principles for Responsible Investment (PRI) and is a member of the initiative’s asset owner advisory committee. He is an adviser to the board of the Institutional Investors Group on Climate Change (IIGCC), which USS set up in 2001, and on the board of the International Centre for Pensions Management, the UK Investment Association’s sustainability and RI committee, and the FTSE Russell sustainable investment technical and sustainable investment strategic advisory committees.

A spokesperson for USS would not be drawn on where Russell is moving to, noting that his replacement will be announced in due course. They told Responsible Investor: “David has been a prime mover in the creation and development of the responsible investment capability at USS, has been the public face of responsible investment at USS for many years, and has been instrumental in the creation of several important industry initiatives.”

Dig deeper

Institution: Alaska Permanent Fund
Headquarters: Juneau, US
AUM: $78.7 billion
Allocation to private equity: 19.48%

Alaska Permanent Fund has made $195 million in commitments across seven different private equity vehicles.

The largest of these commitments was a $50 million commitment to TA XV, a multi-regional growth equity fund managed by TA Associates, followed by a $40 million commitment to GTCR Fund XIV, a diversified buyout fund with a North American focus.

As of 30 January, 19.48 percent of the Alaska Permanent Funds portfolio was allocated to private equity.

For more information on APF, as well as more than 5,900 other institutions, check out the PEI database.

Today’s letter was prepared by Alex Lynn with Carmela Mendoza, Madeleine Farman and Katrina Lau.