Side Letter: Florida SBA in Europe, leverage in secondaries, HK tax treat

A couple of reminders first: Private Equity International's Carmela Mendoza is in snowy Berlin at the moment, so look her up. We are currently accepting nominations for our Future 40 list. Now here’s today's brief, for our valued subscribers only.

Just happened

Floridians in Europe


Florida State Board of Administration has its eye on smaller European GPs, senior investment officer John Bradley, tells PEI. The $164 billion pension restructured its PE programme in 2005 and has since reduced its exposure to large-caps in favour of small and mid-market GPs. In Europe, it currently backs nine GPs including Investindustrial and Summa Equity. What worries Bradley about Europe? Whether the eurozone will remain intact.

Secondaries funds leaning into leverage


One of our fake predictions for 2020 was the emergence of preferred preferred equity – like pref, but with a slightly different risk-return profile. A fund finance report by bank Investec suggests we may, unwittingly, not have been too far off the truth. A total of 8 percent of secondaries funds are using leverage in their own preferred equity deals. Instead of extending pref to a GP using fund capital, secondaries firms can borrow a portion from a bank, creating a tranche with a lower blended cost of capital. This makes it a cheaper option for GPs taking on the pref and can help boost the return to the secondaries fund. Investec didn’t disclose number of funds surveyed, so percentages should be taken with a pinch of salt.

The same survey reported the proportion of secondaries funds using asset-backed finance increased from 35 percent to 63 percent in the space of a year. Of those, 13 percent did so to finance dividend recaps, allowing them to return money to LPs, often as a sweetener ahead of fundraising. Is this a sign of innovation or something more concerning?  Let us know what you think.

HK’s PE overtures

Still reeling from a year of political turmoil, Hong Kong has moved ahead with plans to draw more private equity firms to its shores. According to the Special Administrative Region’s 2020 budget – published Wednesday – the government intends to provide an unspecified tax concession for carried interest on PE funds operating in Hong Kong, provided they meet certain conditions. The arrangement will be applicable starting from 2020-21 upon completion of an industry consultation. Hong Kong was plunged into recession last year and recorded its first annual economic contraction since 2009 as protests against the government’s pro-Beijing stance hit consumer expenditure, investment and the labour market.

They said it

“I came to the view that the sole differentiating criterion was superior or privileged deal flow … That’s what, I believe, keeps certain funds in the top quartile for years. Everyone else is just hustling as best they can”

An anonymous commentator claiming to have been the “number two on one of the best funds in the world” wades into a discussion about the ability of PE firm’s to create value, sparked by a Financial Times Alphaville post about Bain’s report on the PE market.


Vanguard musings. A note from Morningstar reflects on Vanguard’s entry into private markets through its tie up with HarbourVest (see 6 February Side Letter). Morningstar concludes that Vanguard needs to “revolutionise the pricing” for its private equity offering if it is to successfully “do the right thing” by its shareholders. Easier said than done.

They did the math

The weight on fees. Even fund managers in the upper echelons of the industry are feeling downward pressure on management fees, new research reveals. A survey put together by Marco Masotti, who leads the private funds group at law firm Paul, Weiss, and his team has found that the headline management fee rate for most private equity funds is now in the range of 1.5 percent to 1.75 percent per year. This is before blended fee rates or other discounts are taken into account. Masotti also notes that, importantly, due to increasing fund size, the dollar amount of fees is likely to be unaffected.

Dig deeper

Institution: Washington State Investment Board
Headquarters: Olympia, US
AUM: $141.79bn
Allocation to alternatives: 35.17%
Bitesize: $200m-$500m

Washington State Investment Board has committed up to $200 million to Endeavour Capital Fund VIII, a contact at the pension informed Private Equity International. The $141.79 billion US public pension has a 23 percent target allocation to private equity that currently stands at 16.88 percent.

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

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