Side Letter: Forget ‘top-quartile’; KIC’s new CIO; Australia’s ESG crackdown

Professor Oliver Gottschalg of MJ Hudson explains why LPs might want to reconsider their fixation on whether managers can be considered top quartile. Plus: A lack of deployable capital is hindering secondaries dealflow and Australia could be the next market to crackdown on ESG. Here's today's brief, for our valued subscribers only.

Just happened

Best-in-class: a superior way to compare GP performance? (Source: Getty)

In a high-growth sector like tech, top-quartile managers can seem 10 a penny. But if everyone specialising in this sector outperforms generalists almost by default, how do LPs distinguish between GPs that are doing well because they’re in tech, and those that are doing tech well? That’s a conundrum Professor Oliver Gottschalg, head of MJ Hudson’s Fund Performance Analytics team, sought to answer in a Private Equity International guest comment this week.

The full article is well worth a read, both for LPs hoping to refine their GP selection processes, and sponsors hoping to better convey their strengths to potential investors. Still, the bottom line is this: LPs should care less about how sector-specialists rank against the wider universe of GPs, because industries growing at different rates may behave differently on the performance charts. Instead, LPs should compare fund performance on a like-for-like basis, taking into account the types and size of companies within a portfolio, and the timing of their investment, to find relevant peers.

In doing so, LPs should be able to ascertain how a sector specialist compares with those offering – at least on paper – the same investment strategy. At a time when tech valuations are taking a beating, LPs may take comfort in knowing they have not backed a GP that has been propelled into the top quartile by a decade-long bull market, but rather a sectoral expert that knows precisely how to create or preserve value within its field.

Running dry?
A lack of capital to deploy is choking secondaries dealflow. That’s according to Evercore‘s Private Capital Advisory’s H1 2022 Secondary Market report, as reported by our colleagues at Secondaries Investor (registration required). “There’s less than one year of [secondaries] dry powder,” Nigel Dawn, head of Evercore’s private capital advisory group, told SI. “It’s just an undercapitalised part of the overall private equity market right now. Saying undercapitalised and private equity in the same sentence is not typical.” Here’s what you need to know from the report:

  • Secondaries dry powder sits at $94 billion, a slight decrease from the $105 billion available for deployment at the end of 2021.
  • Evercore estimates that first-half transaction volume saw a 11 percent year-on-year increase to $53 billion.
  • GP liquidity solutions made up 51 percent of market share – a meaningful contraction compared with the first six months of 2021, when volume was around 60 percent.
  • Single-asset processes captured 25 percent of market share in H1 2022.
  • Preferred equity volume reached $5 billion, compared with $3.6 billion in H1 2021.


Korea Investment Corporation, the world’s 38th largest PE investor according to the PEI 300, has named a new chief investment officer, per a Wednesday statement. Hoon Lee, head of Investment strategy and innovation division, has been promoted to the role with immediate effect, replacing Park Dae-yang, whose three-year term ended in August. Lee joined the $205 billion sovereign wealth fund in 2014 and is credited with developing the fund’s asset allocation and investment strategies. Mounting institutional demand for international private investments is making South Korea an attractive destination for GPs. Still, fundraising in the market demands patience and persistence; you can read five tips for doing so from Monument Group’s Albert Jun here.

ESG Down Under
First Europe and the US; now Australia. The latter plans to become the latest market to drill down on ESG legislation next year, federal minister for financial services Stephen Jones, told Pro Bono News. “A lot of our companies are operating in other countries where they have to comply with [more stringent] ESG related regulations, so they are ahead of the government,” he said, noting that Australia is about five to 10 years behind the rest of the world in regards to ESG regulation. “More needs to be done so it is the rule and not the exception.” Of particular focus would be the E part of ESG among fund managers, likely as a result of Australia’s proximity to the climate crisis.

ESG is also facing greater scrutiny in the UK. Its Financial Conduct Authority raised the topic of greenwashing in a letter to alternative fund managers last week, and asked managers to ensure the “documentation of such products are clear, not misleading and that firms’ actions match the stated claims”. Rules being prepared by the US’s Securities and Exchange Commission, meanwhile, will also require additional disclosure on ESG. Earlier this year, the SEC’s Office of Compliance Inspections and Examinations listed ESG-related issues as one of its primary priorities for 2022 examinations of registered investment advisers.

Today’s letter was prepared by Alex Lynn with Carmela Mendoza and Madeleine Farman.