Side Letter: Carl Thoma on pricing ‘denial’; Gensler’s fee focus; AllianzGI’s opportunities

Buyout pioneer Carl Thoma says circumstances will need to worsen for buyers to find bargains. Plus: SEC chairman Gary Gensler has made a fresh case for private fund reforms and where AllianzGI spies opportunities this year. Here’s today's brief, for our valued subscribers only.

Just happened

Thoma’s take
Carl Thoma has been here before. The software buy-and-build pioneer was present at private equity’s birth in the 1970s; helped found buyout shop Golder Thoma (the predecessor of GTCR) in 1980; and in 2008 partnered with Orlando Bravo to launch Thoma Bravo, now one of the industry’s largest players. With a fair few cycles under his belt, it stands to reason that Thoma has a good sense of what might be around the corner in this latest one. Our colleagues at Buyouts had a chance earlier this month to ask Thoma whether PE buyers can expect opportunities to come in 2023, in addition to the myriad challenges they’re facing. Here’s what he said:

“A little bit, but not as much as you might think because people are still in denial, they’re still thinking their stocks will bounce back. As a seller, your feeling right now is, ‘My company is still growing, valuations are down, I don’t really need the money, so I’m just going to kind of ride out the storm’.

“It’s going to have to get worse before we see any real bargains. Or time is going to have to run to when somebody finally says the incremental return we get for holding this asset has dropped down to the point that maybe we should just take a lower price and recycle the money. But we’re not there yet. I don’t know whether that’s six months from now or a year.

“I think we’re going to muddle through this. We may be going into a slower paced stock market, which is not the end of the world. It just puts a bigger premium on ‘don’t overpay too much and make sure your companies are best-in-class’.”

The full interview, which touches on a number of subjects, including buy-and-builds, fundraising and returns, is well worth a read. Find it here (registration required).

Gensler’s fee focus
US Securities and Exchange Commission chairman Gary Gensler has made a fresh case for private funds reform, our colleagues at Regulatory Compliance Watch report (registration required). In a prepared speech before the Small Business Capital Formation Advisory Committee last week, Gensler drew attention to the “$250 billion in fees and expenses each year” that is being paid by pension beneficiaries and business owners.

A private fund fee, Gensler said, is “money that portfolio companies, like small businesses, do not get to use. Though fees among other funds – such as mutual funds and exchange-traded funds – have had significant reductions in recent years, private fund fees have not come down in a comparable way”.

Under Gensler, the Commission has proposed a number of drastic private fund reforms. It gathered feedback from the industry last year; the final form of the proposals is yet to emerge.

While we’re on the subject…
In a recent priorities report, the SEC has identified ESG as one of its four “new and significant focus areas” for 2023, our colleagues at New Private Markets report (registration required). For a lot of investors, this will come as no surprise: the SEC has been sharpening its focus on managers’ ESG claims during its examination process for some time now. In 2022, the SEC began looking more closely at managers’ claims related to greenhouse gas emissions – in particular, whether or not emissions data is communicated to investors – and the voluntary standards and frameworks being used across the industry.

The update in the SEC’s 2023 Examination Priorities Report notes that investor demand for ESG-related investments and strategies is on the rise and, as such, registered investment advisers are in competition for it. The SEC will “continue its focus on ESG-related advisory services and fund offerings, including whether the funds are operating in the manner set forth in their disclosures”, the report notes. In addition, it will “assess whether ESG products are appropriately labelled and whether recommendations of such products for retail investors are made in investors’ best interest”.


AllianzGI’s ‘compelling opportunities’
Allianz Global Investors believes co-investments and GP-led secondaries will offer “compelling opportunities” this year. In a market outlook paper, Emmanuel Deblanc, global head of private markets at the €521 billion asset manager, said the tougher market for fundraising and portfolio adjustments would lead to GPs stretching their investment periods through co-investments. Sponsors will become more reliant on large and trusted partners to deliver on transactions, AllianzGI noted. “Those same partners will be called up on for GP-led secondaries and continuation funds, which should offer our investors appealing entry points,” Deblanc wrote. Infrastructure equity and credit, are likely to be where the biggest secondaries opportunities to capture value will be.

Dig deeper

Name: Kern County Employees Retirement Association
HQ: Bakersfield, US
AUM: $5.2 billion
Allocation to private equity: 3.1%

Kern County Employees Retirement Association has disclosed its private markets pacing plan and a $30 million commitment to ACCEL-KKR Capital Partners VII, according to its recent board meeting material.

The Bakersfield, California-based pension fund has a 15 percent long-term target allocation for private markets. The target allocation for private equity is 5 percent, which includes venture capital and PE secondaries. The remaining 10 percent is equally divided between private debt and private real estate.

KCERA disclosed its PE commitment pacing plan for 2023 and 2024, which would be around $85 million in commitments for the year 2023 and the same for 2024.

The pension also said it is targeting to commit 50-70 percent of its PE allocation to buyouts and 20-40 percent for growth equity and venture capital. The fund’s recent commitments have predominantly focused on North America.

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

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