Side Letter: Gensler’s PE curtain-raiser; Investindustrial’s new friends; Europe’s record fundraising

A vote today on private fund reforms could set the tone for a far more significant overhaul down the line. Plus: Investindustrial has closed its third growth fund; and European fundraising defied macroeconomic uncertainty to break records last year. Here’s today's brief, for our valued subscribers only.

Just happened

Gensler: setting the tone for PE reform (Source: SEC)

All eyes on Washington…
The US Securities and Exchange Commission is scheduled to vote today on final rules that will require registered private fund managers to report a range of catastrophes to American regulators – from redemption runs to cyber-attacks – within days and possibly within hours of their occurring. A divided Commission put the proposed Form PF rules for comment early last year and offered funds only one business day to report such events.

SEC chairman Gary Gensler took the reform case to his fiercest critics on Tuesday, speaking at a Managed Funds Association’s conference in New York. He reiterated his two favourite themes: that private fund fees are too high, and that the $25 trillion private fund industry has gotten too big to fail.

“We have a number of projects across the capital markets around efficiency. Most important to this group is the private fund adviser proposal,” Gensler said. “This proposal uses the tools of transparency and market integrity to promote competition and efficiency.”

Still pending are yet more changes to Form PF and a megatonne SEC rulemaking around private fund fees. LPs have been urging the SEC to scrap proposed rules that would require funds that give “preferential terms” to favoured investors to share the details of the side letters with other investors. The rules would also ban a host of fees and expenses and require all funds – registered or not – to audit their books yearly and share the results with regulators and investors.

Today’s vote on PF reporting feels like something of a curtain-raiser: the real drama will likely come when Gensler tries to finalise the PF compliance reviews (in other words, the bit with the fee bans, side letter disclosures, etc.)

The question is whether Gensler wants to show the industry he can be flexible now and perhaps take the sting out of challenges to the weightier rules that still hang in the air.

Investindustrial’s new friends
London-headquartered Investindustrial has held a €1.1 billion final close on its third growth fund, per a statement this morning. Growth Fund III launched in April last year with a €1 billion target. Re-ups from existing investors represented about 90 percent of total commitments, and three-quarters came from European LPs. New relationships included US and UK pension funds, as well as Italian pensions, insurers and foundations, IR head Carl Nauckhoff told Side Letter. He added that the firm’s GP commitment was above 10 percent, slightly higher than its average across previous funds.

Growth Fund III will back lower mid-market European companies focused on industrial manufacturing, healthcare and services, consumer and leisure, and technology. The firm has secured its first deal – medical device contract manufacturing platform Arterex – and is eyeing 10 investments over a 3.5-year period.

Investindustrial’s buy-and-build strategy has gained momentum of late, Nauckhoff added, with the firm having closed 165 add-ons since inception across its 80 portfolio investments, of which 40 came in the last two years.

Asked about the deal environment, Nauckhoff said debt availability for lower mid-market deals is “not an issue”. “We’re focused on the niche B2B industrial businesses,” he added, noting that the firm has a historical average debt-to-EBITDA ratio of 3.5x in its investments. “There is a bid-ask spread in the market – it is not insurmountable. Particularly in the lower end, one of the things we don’t worry about is that we don’t run a highly levered strategy. If you’re looking to get anything above 5x, 6x, that market does not exist.”

Investindustrial is also understood to be in market with its eighth flagship fund, seeking a similar amount as its €3.75 billion predecessor.

CalSTRS’ climate capital
The California State Teachers’ Retirement System is looking to increase its PE allocation by 1 percentage point to accommodate climate investments, our colleagues at New Private Markets report (registration required). Though a marginal increase, the percentage would equate to over $3 billion of the pension’s assets. Staff at the pension fund will make the proposal to its investment committee on Thursday.

The state pension is not the first to prioritise climate investing. CalSTRS’ peers, including the New York State Common Retirement Fund and Canada’s Public Sector Pension Investment Board, are setting up dedicated pools of capital to target climate investments (registration required). LPs more broadly have yet to reach a consensus on where climate-related investments should sit within their strategic allocations, with these funds sometimes encompassing multiple asset classes. As Private Equity International noted in September, some LPs believe climate investing deserves its own bucket.

They did the math

Stats EU need to know
The UK and Ireland, and the Nordic region were the only two bright spots when it comes to European fundraising last year, per Invest Europe’s latest annual report, published this morning. UK-based firms saw an 88 percent year-on-year increase in capital raised last year, with Nordic firms up 35 percent. Hg’s Saturn 3, which held its final close on $11 billion in August, and Nordic Capital’s €9 billion Nordic Capital XI are among those contributing to total fundraising. Here are some key findings from the report:

  • European PE and VC fundraising defied uncertainty to reach a record €170 billion in 2022. Buyout strategies accounted for 65 percent.
  • Pensions accounted for 27 percent of committed capital, followed by sovereign wealth funds at 15 percent and funds of funds at 11 percent.
  • Total equity invested in European companies reached €130 billion, of which €81 billion came from buyout firms – 23 percent above the five-year average.
  • Information and communications technology assets garnered the most capital, at €23 billion, followed by business products and services at €18 billion.
  • PE and VC exits dropped 27 percent to €33 billion and exit count fell 17 percent to 3,340. Sales to other PE firms were the most popular exit route, comprising 41 percent of divestments for the year.


Fueling interest in PE
For many firms hoping to capture the growing private wealth opportunity, liquidity – or a lack thereof – remains an obstacle. Miami-headquartered Fuel Venture Capital, which invests across stages in financial services and IT companies, has found a novel solution to this issue, our colleagues at Venture Capital Journal report (registration required).

Fuel Venture Capital Flagship Fund II will offer a Fuel VC Note – a listed, transferable security that can be bought and sold at any point during the fund’s life cycle – to individual investors for as little as $125,000. Investors in the fund will be separated into two categories, each paying different management fees: ‘regular’ LPs, who commit a minimum of $1 million, will pay the standard 2 percent management fee and 20 percent carried interest, while ‘public note holders’ will pay a 1.5 percent fee and 15 percent carry. So far, Fund II has held a first close on $124 million, which was mostly raised from traditional LPs and a small number of individuals.

As PEI reported in its 2023 Democratisation Report, GPs are increasingly seeking the attention, and capital, of wealthy individuals. Fuel’s founder and managing director Jeff Ransdell believes his background overseeing $130 billion for private clients as a Merrill Lynch executive is what sets his firm’s strategy apart. “I understand that [wealth management] business very well,” he told VCJ. “I sat in their shoes. I know how to serve them. I know what it takes to get a client and what it takes to keep a client.”

Today’s letter was prepared by Alex Lynn with Bill Myers, Adam LeCarmela Mendoza, Helen de Beer and Katrina Lau.