Side Letter: EQT’s markdowns; PE’s pension pros; AIMCO’s Asia buildout

EQT has marked down two of its private capital funds to reflect the decline in public market pricing. Plus: a look at which US public pensions are the best at private equity investing and a $128 billion asset manager has grand designs for Asia. Here's today's brief, for our valued subscribers only.

Just happened

PE valuations: marked down to match public market references (Source: Getty)

EQT’s PE pricing
EQT‘s latest half-year earnings are a reminder that private equity is not immune to the rout in public market valuations. The 2015-vintage EQT VII was marked 0.1x lower at 2.7x gross MOIC in H1 2022, the 2017-vintage EQT VIII was marked 0.2x lower at 2.4x, and EQT IX remained at 1.4x. “During the first half of the year, fund valuations were generally supported by strong operational performance among portfolio companies, and certain exits at valuations above fund valuations, offset by lower public market valuation references,” the earnings statement, out this morning, noted. A mismatch in public and private valuations – which lags the former by a quarter – threw various corners of the market in flux earlier this year, with buyers and sellers in both direct and secondaries transactions often unable to agree on pricing; EQT’s markdowns suggests the private markets are beginning to catch up.

Here are some other takeaways from the earnings:

  • EQT X had collected €10 billion towards its €20 billion target and €21.5 billion hard-cap as of 30 June. It has since raised “two-thirds of the fund size” and is expected to materially conclude fundraising this year, with a final close in 2023.
  • EQT X will be activated in Q3 2022, upon completion of its first deal.
  • EQT’s funds deployed €5 billion across all asset classes in the first half, compared with €7 billion in the same period last year. They notched €4 billion of exits, less than half the €10 billion recorded in H1 2021.
  • AUM reached €77 billion, of which €2 billion was contributed by Dutch life sciences investor LSP, which it acquired last year.

Déjà vu?
New Hampshire Retirement System is the latest US pension to overshoot its PE allocation target for the first time, our colleagues at Buyouts report (registration required). The $11.4 billion system’s distributions ($400 million) outpaced capital contributions ($260 million) last year, marking the first time its PE portfolio has generated positive cashflow since the programme was established in 2009, according to a presentation at its June board meeting. A 37 percent return in its PE portfolio brought New Hampshire’s actual allocation to 13.9 percent, above its 10 percent target. The system has made four commitments totalling $200 million this year to Thoma Bravo XVClearlake Capital Partners VIIWarburg Pincus Global Growth 14 and HarbourVest Partners‘ Dover Street XI; it has just $50 million remaining in possible PE contributions for the rest of 2022.

New Hampshire’s situation echoes that of many US public pension systems, which have struggled to find capacity for all the managers returning to market while remaining within their policy limits – a task that has become much more challenging as the value of public holdings decline. The potential implications of this dynamic are the subject of Private Equity International‘s ongoing mini-Deep Dive this week. So far we’ve examined:

They did the math

PE’s pension pros
The Illinois State Board of Investment had the best performing PE portfolio of any US public pension for the third year in a row, according to the American Investment Council’s 2022 Public Pension Study. Illinois notched up a 19.8 percent annualised return net of fees for the 10 years ended 30 June 2021. AIC analysed returns of 176 US public pension funds representing 34 million public sector workers and retirees in the study. Overall, PE delivered a 15.1 percent median annualised return over the period, surpassing public equity’s 11.8 percent and real estate’s 9.5 percent. With persistently high inflation, rising interest rates and a potential recession, these figures could well change in the years ahead.


AIMCO in Asia
‘Hong Kong or Singapore’ is a decision that has plagued many private markets participants expanding into Asia through the years. Alberta Investment Management Corporation, for its part, has settled on the latter, according to Bloomberg (subscription required). The C$168 billion ($128.6 billion; €128.4 billion) asset manager will put staff on the ground to help expand its exposure to the region, Peter Teti, head of PE and international, is quoted as saying. “Singapore is increasingly attractive relative to other places like Hong Kong that are close to China and that have experienced some geopolitical issues,” he added. Hong Kong has become logistically challenging for some businesses, with travellers still required to undergo seven days of hotel quarantine upon arrival. It remains a draw for some firms, however: Vista Equity, for example, chose the Special Administrative Region as the location of its first international outpost earlier this year, as Private Equity International reported.

Capza’s carry
Paris-based Capza plans to link its carry to achieving ESG KPIs for its latest fund, a source familiar with the firm told our colleagues at New Private Markets (registration required). Capza declined to comment on the ESG-linked carry mechanism. The firm previously trialled ESG-linked carry for its sixth private debt fund, launched last year.

Capza is one of several early movers tying carry to ESG or impact targets. While supporters of such moves all agree that they are putting their money where their mouths are, designing carry schemes that create the intended incentives is far from straightforward, as PEI explored in November.

Today’s letter was prepared by Alex Lynn with Carmela Mendoza and Toby Mitchenall.