Side Letter: Goldman cuts PE, CalPERS’ kickstart, peak LBO, reform Down Under

Does PE demand "significant stress capital", have we hit peak LBO funds and can CalPERS press the pedal to the metal on co-investments? Today's brief goes to valued subscribers only.

Just happened


Staff at the Californian pension want to restart their co-investment programme, which has stalled over speed of execution and is seeking board approval for a quick turnaround on co-investment decisions. In an investment committee meeting on Monday, CalPERS’ PE team said it had studied the co-investment programmes of 10 of its global peers and found they got started through syndications – which require the least staff resources – before graduating to more engaged co-investment strategies.

Goldman stress

Goldman Sachs plans to slash its balance sheet private equity activity and focus on managing clients’ assets in fund form. The move will reduce the capital intensity of its PE business, which requires “significant stress capital”, CFO Stephen Scherr said during a first quarter earnings call (earnings results here too).

The investment bank’s global equities portfolio comprises $21 billion of private equity and $1 billion of public stock across nearly 1,000 investments. Significantly lower net gains from PE contributed to a 21 percent drop in net revenue from equity securities, compared with Q1 last year.

Peak buyouts

LBO funds reached peak TVPI in 2017 and 2018 – 1.47x and 1.46x, respectively – the highest in a decade, according to data from eFront (chart below). The champagne stays on ice, though. Such levels are unlikely to hang around as further progression is “unlikely” given the current late-cycle phase we’re in. Time-to-liquidity ratios dropped to 2.7 years in 2018 from 3.9 years in 2015 as GPs capitalise on high valuations to cash out and shield performance from a potential abrupt end of the current cycle. Tough to sustain long-term.


Reform Down Under. Australia’s private equity and venture capital industry body has called upon the country’s next federal government to scrap fee and cost disclosure regulation for superannuation funds. Regulation from 2017 requires supers to disclose fees and costs paid on investments – prompting some to shy away from PE as the 2 percent management fee can seem comparatively expensive.

Scrapping such disclosures would be a boon for PE. Aussie supers have around a 4 percent allocation to PE and VC, well below the 16 percent held by the country’s SWF and and 8 percent by the US’s 200 largest pension funds.

Barbarians at the torii gates. Japan is KKR’s “highest priority” besides the US, according to its founders. “If you look at value to price of stock and cost of capital, it’s here,” Henry Kravis told the Financial Times (paywall). KKR is approaching Japan in 2019 with the leveraged buyout playbook it used in the 1970s and ’80s. George Roberts says he feels “more comfortable” investing in Japan than China.

Mega deals, aka large corporate carve-outs, primed for private equity capital coupled with more modest valuations (around 8x EBITDA) are increasing interest in Japan, as we’ve explored in our Japan Special coverage this month. The KKR founders’ comments are the latest highlighting the country as a top priority for global investors.

Breaking news: Henry Kravis and his wife Marie-Josée Kravis are donating $10 million to help restore Notre-Dame Cathedral after yesterday’s fire.

Inside tip

PEI senior reporter Carmela Mendoza will be in Paris from tomorrow hosting our France roundtable. She’d love to meet up with you if you’re there.

Dig deeper

Want more data? There are more than 6,700 institutions in our database, including KKRCalPERS and Goldman Sachs from today’s Side Letter.

Roberts said it

“The question is: are you making money in what you’re doing or not? Prices are only going one way since we started and that is upwards and to the right.”

In an interview with the FT, KKR co-founder George Roberts dismisses suggestions private equity is in a bubble

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Today’s letter was prepared by Isobel Markham , Adam LeCarmela MendozaAlex Lynn and Preeti Singh.

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