Side Letter: Emerging manager takeaways; BC Partners’ pet peeve; end of Electra

What's top of mind for Europe's emerging managers? Plus: Senator Warren on the prowl again and an $18 billion UK pension makes a foray into PE. Here's today's brief, for our valued subscribers only.

They said it

“AUM growth is the reward for good performance, it is not the goal”

Apollo Global Management chief executive Marc Rowan directed his firm to remember the promise of alternatives: delivering excess return per unit of risk to clients, not simply scaling up for scale’s sake alone, during an earnings call on Tuesday.

Just happened

Emerging manager conference takeaways
Side Letter tuned into Unigestion’s Emerging Managers Europe Conference on Wednesday. Here are some highlights:

  • There have been more than 60 successful closings in the European buyouts growth segment since the beginning of 2020, notwithstanding travel restrictions due to the global pandemic, according to Unigestion’s data.
  • Although LPs do not always have the bandwidth to cover this segment in detail, the main drivers for backing emerging managers include getting exposure to lucrative returns, as well as differentiated strategies.
  • What drives premium returns? Motivation and energy, according to Jan Faber, managing partner of Bregal Investments. These are at the “max” for first-time GPs and are a key driver behind his firm’s wish to get involved in first-time teams, Faber said on one panel. He added: “The energy behind the team is a good ingredient for success – that first fund needs to work, do or die.”
  • A more specialised strategy is also critical, noted Wilf Wilkinson, managing partner of Acanthus Advisers. Often, emerging managers are focused on more complex cases that usually require operational expertise to be within the core team.
  • That said, more safety measures are being added to the LPAs to ensure that LPs in first-time funds are protected. These include tightening the time spent on the fund – making sure the GP does not spend time on other products, side cars and continuation vehicles – as well as triggers for a key-person event, said Gabriel Boghossian, a partner at Stephenson Harwood.

Pet peeves
Readers will recall from yesterday’s Side Letter that BC Partners has made the first investment from its dedicated strategy by buying pet retailer Pet City in Greece (a spokeswoman for the firm declined to comment on the size of the fund and didn’t provide further details). The announcement came a day after PE critic and US senator Elizabeth Warren sent a letter to BC Partners asking for its response to a report about bad conditions for animals and workers at PetSmart, a pet retailer the firm acquired in 2015. The BC spokeswoman didn’t provide a response to us regarding Warren’s letter.

TPT’s (sort of) PE play
TPT Retirement Solutions, a £13 billion ($17.7 billion; €15.3 billion) UK workplace pension scheme, is investing in PE… sort of. The scheme will deploy £54 million into listed PE assets such as investment trusts and the stock of listed PE firms, per a statement. Members of TPT’s Target Date Funds, managed by AllianceBernstein, will see 3.5 percent of their pension pot allocated to the asset class at no extra cost.

“This approach is expected to provide long-term return enhancement, while also providing diversification to the funds’ growth assets and avoiding the high costs and illiquidity of direct private equity investments,” TPT said.

UK DC pensions have been flirting with PE of late. Workplace pension giant National Employment Savings Trust is among the most bullish, having unveiled plans this year to invest at least £1 billion into the asset class. The government is also toying with the idea of revising rules around allocation limits. The opportunity set that’s up for grabs is not insignificant: assets managed by UK DC schemes are forecast to grow to more than £1 trillion by 2030, according to the Financial Conduct Authority.

Essentials

Cheque please!
How do you encourage staff to come back to the office during the pandemic? For some firms, it’s a mix of offering hybrid working schedules and ensuring colleagues are vaccinated. For others, it’s financial incentives, as our colleagues at Buyouts report (registration required). MiddleGround Capital, a Kentucky-headquartered mid-market firm, is offering staff at its portfolio companies $250 gift cards to encourage vaccinations. “It’s more of a positive way to encourage people to get vaccinated,” says founding partner John Stewart.

Electra becomes Unbound
Electra Private Equity is bringing to an end its 45 years as an investment trust. The London-listed trust is moving down to the AIM market and renaming itself Unbound Group, Dow Jones reported. The new entity will initially own portfolio company Hotter Shoes before expanding into other consumer-focused business lines.

On Wednesday, Electra also demerged and floated portfolio company Hostmore, owner of restaurant chain TFI Fridays. The listing was an attempt to generate cash for investors in light of a boardroom coup by activist investor Edward Bramson, who in 2015 triggered a strategic review that led to the trust’s general partner Electra Partners having its contract terminated.


Today’s letter was prepared by Alex Lynn with Adam LeRod JamesCarmela Mendoza and Michael Baruch