Private Equity News & Analysis

Side Letter: Brookfield’s leadership line-up; LACERA’s ‘most powerful’ tool

Brookfield has unveiled the leadership team for its $80 billion asset management spin-out at a time when LPs are likely to be scrutinising succession plans. Plus: LACERA has voiced its concern over the SEC's bid to crack down on preferential treatment in side letters. Here's today's brief, for our valued subscribers only.

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Just happened

What to watch
Succession may well be one of the hottest things to watch in 2022. No, not the binge-worthy HBO series starring Brian Cox and Kieran Culkin – rather, the plans that GPs have in place to ensure a smooth leadership transition. In a Q2 earnings call last week, Brookfield Asset Management outlined major leadership changes tied to its plan to spin-out an $80 billion asset management unit.

Bruce Flatt will remain chief executive of the new business, with existing Brookfield CFO Nicholas Goodman appointed president and CFO; renewables boss Connor Teskey appointed president; and Mark Carney, the former Bank of England governor, appointed chair. Within PE, Anuj Ranjan, current head of PE for Europe, the Middle East and Asia and head of business development, will become president.

The changes, which include “advancing younger executives as fast as we can”, Flatt said, seem to anticipate long-term succession events. GP succession planning has dropped down the agenda in investor due diligence of late, with only 58 percent of respondents to PEI‘s most recent LP Perspectives Survey considering it a major part of the process, versus 69 percent in our 2021 report.

Still, the timing of Brookfield’s disclosure appears serendipitous given the sudden and unexpected change at the top of Carlyle this month. If firms haven’t begun thinking about how to form and articulate succession plans to investors, sooner rather than later would be a good time to start.

In defence of side letters
The US Securities and Exchange Commission’s bid to make private funds more investor-friendly has come under fire from an unlikely source. The $73 billion Los Angeles County Employees Retirement Association has criticised the regulator’s proposed prohibition on preferential terms in side letters, our colleagues at New Private Markets report (registration required).

Writing to the SEC on 28 July, chief investment officer Jonathan Grabel said: “We recognise that the commission’s aim is to enhance market transparency by prohibiting any side letters unless certain terms are met, such as disclosure to other [LPs]. In practice, we believe such a provision would risk creating a chilling effect on [LPs’] ability to secure side letters, thereby creating several deleterious effects.”

The effects in question – Grabel argued – would include obstructing investors’ ability to exercise their fiduciary duties and secure greater fee transparency, while also impeding market innovation. LACERA, for its part, uses side letters to ensure managers report on a fund’s ESG and DE&I progress and performance. “Investors have limited tools to advance market practices,” he added. “Side letters are key – if not the most powerful – among them.”

LACERA’s views appear to be at odds with some of its peers. The Institutional Limited Partners Association, the most influential LP representative body globally, for example, has welcomed the SEC’s proposals, arguing they would help address conflicts of interest prevalent in the industry and help investors verify contractually agreed fees and expenses. But, as the 47th largest PE investor globally and the 23rd largest in the US (per PEI‘s Global Investor 100), the institution’s opinion bears weight; its opposition to proposals ostensibly designed for LPs’ benefit is significant.

Essentials

Early-stage slow down
Valuations for early-stage US companies fell back to earth in the second quarter. Companies further on in their development are yet to feel the impact, our colleagues at Venture Capital Journal reported last week, citing Pitchbook data. At the early stage (Series A and B deals), the median pre-money valuation was $52 million in Q2, down from a record high of $62 million in the previous quarter. This marked the first time the median early-stage pre-money valuation has declined since Q4 2019.

Higher up the food chain, the median pre-money valuation for late-stage deals actually increased from the first to the second quarter, from $105 million to $110 million. The growth of late-stage pre-money valuations, Pitchbook noted, may signal that certain start-ups are still able to demonstrate value creation to equity holders. Nevertheless, the median deal size in this stage fell 7 percent to $14 million in H1, versus 2021’s full-year median, as investors become more hesitant to commit to late-stage rounds without favourable prospects of an exit in the near term.

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

15 August

16 August

17 August

18 August

19 August

Today’s letter was prepared by Alex Lynn with Carmela Mendoza, Helen de Beer and Madeleine Farman