Side Letter: GP-led alignment; PE’s PM predictions; ESG’s Florida foe

Alignment in continuation fund transactions may be a tangled web, but routes to success remain, as we explore below. Plus: UK deal certainty could benefit from a leadership change and Florida's ESG crackdown could prove a headache for GPs. Here's today's brief, for our valued subscribers only.

Just happened

Are you aligned?
Ever given any thought to how a portfolio company management team reacts when its PE owner decides to move it from an existing fund into a continuation vehicle? Or how individuals within a GP may be incentivised to act in differing ways to their colleagues when running such a process? You’ll find answers to these questions and more in our latest Deep Dive examining the constituent elements to a continuation fund transaction and how they need to line up for the different stakeholders.

Why you should care:

  • Five years ago, continuation fund activity was worth around $16 billion a year, according to data from Lazard. Last year, this market hit a record $63 billion – a 294 percent increase in just half a decade.
  • Some sponsors are doing this more than once – a sign they increasingly see offering their LPs liquidity options while holding onto assets as a viable fourth exit route.
  • Regulatory pressure means authorities have an eagle eye on ensuring investors aren’t taken advantage of in this burgeoning market, and so they should. Ensuring all parties are aligned in a fair and reasonable way is a key element to helping maintain the healthy growth of such deals which can give LPs more options – if they want them.

PE’s PM predictions
Liz Truss starts her term as UK prime minister today. As it stands, PE participants don’t seem to be expecting any major repercussions from the shake-up. “There would be changes to taxation in some way, shape or form, but all these promised tax cuts, we won’t see that many of them come through,” one London-based head of European investment banking told Side Letter.

Michael Moore, director general of the British Private Equity & Venture Capital Association, meanwhile, has urged the new PM to focus on the UK’s appeal as an investment destination. “This support can help carry us out of the financial crisis and by backing private capital, the PM will be backing growth across the UK,” he noted.

What about future deal activity? As our colleagues at PE Hub Europe note this morning (registration required), businesses can now plan with better clarity, which could signal more mergers and acquisitions in the near-term. “Additionally, with a weak pound and the UK stock market trading at an ever-wider valuation discount to global peers, many UK firms will likely continue to attract investment interest from private equity firms”, said Merlin Piscitelli, EMEA head at M&A technology provider Datasite. Industry insiders also expect increased interventionism amid rising geopolitical tensions, with the UK’s recent National Security and Investment Act granting government the ability to block deals on security grounds.

One-way traffic?
In this day and age, PE executives could be forgiven for forgetting that the direction of travel when it comes to ESG adoption isn’t always one-way. In the US, however, the anti-ESG movement appears to be gaining ground. Florida State Board of Administration, for example, has adopted a resolution preventing the state’s $206 billion pension system from considering ESG when making investment decisions. How Florida’s regulation will define ESG remains unclear; still, its ban could have implications for PE funds that have, or wish to, raise capital from the state’s pension funds. Florida’s move echoes that of Texas, which has ordered state retirement and school funds to divest holdings in financial firms it has identified as boycotting oil and gas companies.

Some US state treasurers are, however, fighting back against the anti-ESG movement, our colleagues at Responsible Investor report (registration required). New York City comptroller Brad Lander and Oregon state treasurer Tobias Read, for example, are both members of For the Long Term, a non-profit helping public treasurers deliver sustainable long-term growth. “It’s so silly; it’s like debating gravity,” Read told RI. “If you’re not as a treasurer thinking about all the things that impact your ability to deliver returns and fulfil your obligation to beneficiaries, then you’re not doing your job. These things have the ability to materially impact our returns, so it’s our responsibility to think about ESG.”


Deerpath to Korea
Innchul Oh, a former senior manager of Hyundai Marine & Fire Insurance‘s global PE team, has transitioned from LP to GP. Oh has joined US private debt firm Deerpath as its head of Korea, according to a LinkedIn post. If Oh’s name sounds familiar, it might be because he caught up with Private Equity International back in March to discuss how the 43 trillion-won ($31.5 billion; €31.5 billion) insurer was coping with the wave of GPs knocking on LP doors this year. “It is very hard to invest with new GPs… so we should consider our existing [GPs],” he said at the time. Here’s to hoping Korean LP attitudes to new manager relationships have softened a little in the months since that discussion.

Inflexion points
If this is supposed to be a less active year for PE firms, no one appears to have told UK mid-market firm Inflexion. The firm this week promoted Sergio Ferrarini to head of technology and Edward Lynch to partner, per a statement. This comes a day after the firm said it had completed its 50th exit to date, collectively returning more than £4.5 billion ($5.2 billion; €5.2 billion) to investors at a gross realised return of 3.6x and 39 percent IRR. Ten of those exits, with a total enterprise value of more than £3.6 billion, have come in 2022 alone – an impressive feat given that market volatility has caused liquidity events to slow for some of its peers. To cap it all, the firm closed its largest fund to date in March. What slowdown?

Dig deeper

LP meetings. Here are some LP meetings to watch out for this week.

7 Sept

8 Sept

9 Sept

Today’s letter was prepared by Alex Lynn with Adam LeCarmela Mendoza. and Craig McGlashan.