Side Letter: Blackstone valuations, CPPIB’s sustainability shift, deceptive data

CPPIB, the biggest private equity investor in the world according to our Global Investor 100, is going further on ESG. It won't be the only institution doing so, says a bfinance survey. Plus more on a topic as old as PE itself: problems with performance calculation.

They said it

“Real estate is probably the easiest place to start, because there is some real estate already in the 401(k) market. Over time, hopefully we’ll move to traditional private equity”

Jon Gray, president and COO of Blackstone, gives his take on the inclusion of private markets investment in defined contribution pension schemes

Just happened

Deceptive data

Winning: why so many funds turn up in the top quartile

If you spend enough time studying PE, you get used to the idea that performance data can be dubious. We visited the topic in some depth last year, but it deserves continuous attention from information gatherers and investors alike.

We were treated to a talk on this subject last week, courtesy of Graeme Faulds. The PE-investor-turned-technologist was a founding partner of SL Capital Partners, before teaming up with a colleague to create TopQ, a platform that allows GPs and LPs to securely share and analyse track record data. TopQ is now part of eVestment.

Faulds took us through the most malleable bits of PE performance reporting: how IRR can make one investment look better than another, even if it makes less money over the same time horizon; how an early winner makes a firm’s since-inception track record practically unassailable; and how the choice of which industry benchmark you use – and how you choose to define vintage year – can catapult you into the top quartile.

Investors have grown to live with the grey areas. The most sophisticated rely only on their own recalculation of cashflow data to make reasonable comparisons between fund A and fund B. For PE investors, that’s life.

Yet when you see the full extent of the variability in how performance data can be presented, it makes you wonder how LPs make any data-driven decisions whatsoever. It also makes you wonder about the sense of having a hurdle rate based on IRR; whether a GP makes a fortune or not hinges on one of the more slippery metrics.

CPPIB’s climate clout
Canada Pension Plan Investment Board is taking the threat of climate change more seriously. The C$409.6 billion ($306 billion; €261 billion) institution has tweaked its policy on sustainable investing to integrate environmental, social and governance considerations – such as climate change – into its investment analysis and asset management activities, according to a statement. The updated policy, which is intended to maximise long-term investment returns without undue risk of loss, also specifically outlines CPPIB’s preference for target companies to align their reporting with the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures.

Like nothing ever happened
Last quarter, Blackstone said that markdowns in its PE portfolio reflected a moment of “great dislocation” and would “reverse given time”. That reversal is already under way.

The firm’s corporate private equity portfolio grew in value by 12.8 percent in the second quarter after a 21.6 percent decline in the first, with tactical opportunities also registering double-digit growth, said chief operating officer Jon Gray on its Thursday second-quarter results call.  High exposure to assets in resilient sectors, such as tech, and the boost to public comparables from the US government stimulus package were key drivers, he noted.

The 2008-vintage Blackstone Capital Partners  VI and 2014-vintage Fund VII accrued a combined $828 million in performance revenues during the quarter, more than double the quarter before. Fee-earning PE assets under management, which also includes secondaries and tac opps, rose 34 percent to $129.3 billion, driven by the start of the investment period for BCP VIII among other funds.

The opportunity presented by covid-19 has yet to fully present itself, Gray added: “A company that has a little capital will utilise that capital to get through a difficult period of time and at some point might hit a proverbial wall… I think more distressed opportunities in the private market are ahead of us.”

Apax Partners last week reported valuations in its 2016- and 2012-vintage funds bouncing back to beyond December 2019’s marks.

They did the math

Still ESG. No asset owner (says a bfinance survey) believes that the coronavirus will lessen investor focus on ESG, while 42 percent believe it will increase it.


Summer reads: EMPEA’s Cate Ambrose
Cate Ambrose, chief executive of EMPEA, has Jonathan Kaufman’s The Last Kings of Shanghai on her bedside table: “When I read the description, I was drawn in immediately. It is a ‘masterpiece of research’ about rival Jewish dynasties that helped create modern China. What a unique and personal perspective on the extraordinary wealth creation the country has seen over the last century.”

Blackstone’s life sciences plans
Following the close this month of Blackstone’s inaugural life sciences fund on $4.6 billion, we caught up with global head of Blackstone Life Sciences Nicholas Galakatos who told us more about the firm’s plans for the vehicle and how BXLS investments are getting involved in the covid-19 area.