Just happened

In for the long haul
Brookfield Asset Management is stepping up preparations for a potential long-hold strategy, our colleagues at Buyouts report (registration required). The Toronto-headquartered alternatives giant is using a large balance sheet and “some of our best relationships” in the institutional LP community to do “a few club deals”, David Aiken, managing partner and head of long-term equities, told Buyouts. This is with a view to building a track record before contemplating a debut long-dated product.

Brookfield first outlined plans for such a fund in November 2021, telling shareholders that it had “begun raising” a strategy that would leverage the firm’s experience “as long-term owners and operators of businesses”. If it follows through on these plans, Brookfield would join the likes of Blackstone, Carlyle, BlackRock and KKR in backing lengthier investment durations.

Target assets are “durable, high-quality companies with secular tailwinds” bought at “a fair price”, and which give evidence of “continuous improvement potential” over the long haul, Aiken told Buyouts, noting that these would be providing essential products and services and generating steady cashflow, boasting “low exogenous risk factors”.

Brookfield’s use of its balance sheet in long-term deals is comparable with the approach taken by KKR, which combines balance sheet capital with third-party capital raised from LPs for its core PE funds. KKR is raising KKR Core Platform II – if it closes on its $16 billion target, it would be the largest long-dated vehicle on record.

Light at the end of the tunnel
Plummeting exit volume for PE-backed assets isn’t likely to last for long, according to research by investment bank Jefferies. Sellers have been using earn-out provisions to bridge valuation gaps, which effectively defers a portion of an asset’s acquisition price until certain milestones are met. At some stage, exit valuations will either recover, or sellers will simply accept lower prices on their assets so they can return capital to LPs, who themselves need distributions so they can both fund existing commitments and make re-ups, Jefferies noted in an April research note.

Overall, the bank expects “moderately positive” performance from buyout funds in the first quarter of this year, citing the almost 3 percent increase in the value of the PE portfolio “industry bellwether Blackstone”. Details from Blackstone‘s earnings call last week here.

Fund finance free-for-all
More participants are jumping into fund finance amid rising demand for liquidity. PJT Park Hill’s Secondary Market Insight Investor Roadmap Q1 2023 report said it had found 30 new entrants to the scene, some of which are investors themselves. One-quarter of investors that participated in PJT’s report – such as asset managers and insurers – had participated in a fund finance transaction, with a growing number of investors doing so from dedicated pools of capital.

There are also a number of managers with credit products adding fund finance as a sub-strategy, Christina Bohm, a principal at PJT responsible for alternative liquidity options and fund finance, told our colleagues at Secondaries Investor (registration required). “These new entrants are realising that if they want to continue to deploy and find attractive, risk-adjusted returns, fund financing is an interesting place to go,” she said.

There were multiple $1 billion-plus fund finance transactions in market in the first quarter, the report noted. Those deals were largely focused on NAV-based lending and preferred equity options, Bohm said, noting that there have been a few sizeable NAV-based financing transactions completed by GPs. Those managers raised against their portfolio of roughly 10 to 15 assets at very modest loan-to-value ratios to use those proceeds to mainly re-invest back into their portfolios – an increasing theme.

Essentials

Future-proofing
EQT‘s impact strategy has so far raised €2.7 billion in “fee-generating commitments”, our colleagues at New Private Markets report (registration required). Still in market, EQT Future is already the largest pool of capital raised for a PE generalist impact strategy to-date. Summa Equity closed its third impact fund last year on €2.3 billion, the largest impact fund in Europe at the time, while TPG has so far raised $2.03 billion for Rise Fund III, according to the firm’s latest SEC 10-K filing. KKR’s Global Impact Fund II had raised $1.98 billion, per its most recent SEC filing.

EQT Future launched with a €4 billion target in 2021. Lead partner Simon Griffiths told NPM that it seeks to deliver “impact at scale” by investing in mature companies that are either “market leaders and larger businesses that we can pivot” to make more sustainable, or large impact-positive businesses that can be scaled further.

EQT, which has linked 20 percent of its carried interest to ESG goals, hasn’t yet incorporated impact targets directly. “As we evolve this strategy, how we think around impacts, how we measure impacts, how that links into our incentives, I think will evolve,” Griffiths said.

Dig deeper

Name: Virginia Retirement System
Headquarters: Richmond, US
AUM: $102.5 billion
Allocation to Public equity: 18%

Virginia Retirement System has confirmed commitments worth $850 million to private equity vehicles during its April investment advisory committee meeting.

VRS has committed $150 million to Ares Capital Europe VI, $250 million to Ares Pathfinder II, $150 million to Oaktree Opportunities Fund XII and a further $300 million to Hellman and Friedman XI.

The pension fund’s current exposure to private equity funds is 18 percent, which is above the target allocation of 16 percent of its $102.5 billion investment portfolio.

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

Today’s letter was prepared by Alex Lynn with Adam Le and Madeleine Farman