Side Letter: Coronavirus vs PE, Hg’s £6bn haul, how to build an IR function

The coronavirus could be the next major episode in the evolution of private equity. Plus: KKR update, Hg fund closes revealed and a podcast on how to build your IR function. Here’s today's brief, for our valued subscribers only.

Just happened

Private equity’s second big test

Private equity has got a bad rap over the past 12 months. Industry leaders seem convinced the problem is one of communication. “[Criticism of private equity] is our own fault as an industry – we should have started earlier to drive transparency,” says one buyout firm director who didn’t want to be named. It is a sentiment echoed by many we spoke to for our deep dive into the recent barrage of criticism aimed at the industry. PE has been generous to investors in terms of returns and information, advocates say, it just dropped the ball when it came to everyone else.

Looking back, the global financial crisis proved to be a defining episode in the development of the private equity industry; the 10-year fund model was flexible enough to allow financial sponsors to protect equity and – albeit with a longer time horizon – deliver returns to investors.

Today’s challenges are different, but they present financial sponsors with the opportunity to prove their mettle once again, not just as stewards of capital, but as stewards of businesses and jobs. The possibility of disruption – both operational and economic – looms for businesses of all sizes; earnings will be affected and workers may find themselves housebound, with financial consequences for the individuals. In these circumstances employers will be under scrutiny. If private equity-backed companies – benefiting from a superior ownership model – come through this better than those under other forms of ownership, that’s a pretty strong validation.

Coronavirus update

KKR confirmed on Tuesday that one of its London staff has contracted the virus and is “recovering well” at home, according to Bloomberg. The firm is temporarily closing both offices in the city for sanitisation and will have employees work from home until further notice. It will also require personnel who have been in close contact with the unwell employee to quarantine themselves for 14 days. A Deutsche Bank employee in Frankfurt has also contracted the virus, prompting the institution to divide its sales and trading teams at the affected offices in a building across from its main towers, per the report.

Mercury to Saturn

Hg is set to hold final closes on at least £6 billion ($7.8 billion; €6.9 billion) this month for its two North Europe-focused mid-market vehicles, Genesis 9 and Saturn 2, according to investment committee documents prepared for the Pennsylvania Public School Employees’ Retirement System dated 11 February. The firm expects a one-and-done on Genesis 9 and could raise up to £4.4 billion. More on that here.

He said it

“Convergence may be a legitimate investor concern, but there is no evidence of its presence today.”

Stephen Nesbitt, chief executive of investment advisor Cliffwater, refutes claims that private equity returns have come down to the same level as public equities. Cliffwater regularly researches net returns from a group of 53 US public pensions; its latest instalment tracks returns over 19 fiscal years.

Essentials

Is building your own in-house IR team worth the effort and cost? That’s the subject of our latest Spotlight podcast, out this morning. According to Simon Nixon and Mary Gay Townsend of executive search firms Carpenter Farraday and Norgay Partners, there are huge benefits to having both an internal IR team and employing an external placement agent at the same time. Mind blown? Find out more here.

GP interests, mk II. Could infrastructure be a more likely hunting ground for GP interest deals than private equity? James Wardlaw, vice-chairman of infrastructure at Campbell Lutyens, tells Infrastructure Investor’s Zak Bentley that because capital comes back at a slower pace compared with PE, “your GP commitment to each fund is an amount of money the manager may sometimes struggle to fund”. Infrastructure GPs may turn to investors to help raise that finance.

Dig deeper

Institution: Employees Retirement System of Texas
Headquarters: Austin, US
AUM: $29.40bn
Allocation to alternatives: 28.45%
Bitesize: $50m-$100m

Employees Retirement System of Texas has confirmed $80 million-worth of private equity commitments to two vehicles, a contact at the pension told Private Equity International. The commitments comprise of $50 million to HitecVision VIII and $30 million to MBK Partners V.

The $29.4 billion US public pension has a 13.0 percent target allocation to private equity that stands at 14.70 percent. As illustrated below, the ERS Texas has made 11 commitments to private equity funds with a 2019 vintage, which, combined, constitute $537 million.

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


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Today’s letter was prepared by Toby MitchenallIsobel MarkhamAdam LeCarmela Mendoza and Alex Lynn.


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