Side Letter: Hellman & Friedman’s timing; KTP’s 34% return; Shell turns seller

Hellman & Friedman is wary of LPs being overallocated as it gears up to raise another mega-fund. Plus: Korea Teachers' Pension is reaping the benefits of its hefty alternatives portfolio and Shell is looking to shed some weight. Here's today's brief, for our valued subscribers only.

They said it

“It was an enormous betrayal, one that made you question life. We have borne a lot of misunderstandings, false accusations and cheap shots. Some people think I participated in or even perpetrated the fraud”

Speaking to the The Wall Street Journal, David Li, chief executive of China’s Centurium Capital, discusses the 2020 fraud scandal at Luckin Coffee, which the firm now majority owns.

Just happened

Timing the market
GPs, especially those investing in popular strategies like enterprise software, are coming back to market quicker than ever. Case in point: San Francisco’s Hellman & Friedman, which closed its 10th flagship fund on $24.4 billion in July, is in preliminary stages of talks with LPs about launching its next flagship later this year, affiliate title Buyouts reports (registration or subscription required). The firm is eyeing a close in Q3 2023.

The precise timing of its launch may depend on whether LPs have already maxed out their allocations for 2022, given that the market is already jam-packed with large, in-demand shops such as Thoma BravoSilver LakeBlackstone and Vista Equity. If that proves to be the case, it could be more advantageous to get on LP calendars for 2023.

Hellman is unlikely to be alone in its thinking. Side Letter is aware of at least one multi-billion dollar firm expected to delay its fundraise to 2023 in part because of expectations it may be more difficult to attract LP eyeballs this year. Though a strong performer such as Hellman is likely to be in high demand (its 2014-vintage Fund VIII was generating a 25.4 percent net IRR and a 2x multiple as of 30 June, per California Public Employees’ Retirement System data), it is telling that the firm is conscious LPs may not have capacity for yet another mega-fund.

“I have heard a few groups mention they might consider delaying between Q4 2022 launch, versus a 2023 launch,” one senior placement agent executive tells us. “Given the fierce competition for re-ups and many GPs… coming back to the market quicker, the bulk of the pressure will be on segments such as those slightly under-performing GPs, where re-ups are not easy to obtain.”

A recognisable name alone does not guarantee a barnstorming fundraise (recent example here). Those planning to return to market this year without a track record or investment thesis as compelling as Hellman’s might want to reconsider their timing.

A valuable lesson for Teachers’
One reason why GPs might struggle to secure hefty tickets from LPs this year is their own success, with PE’s strong performance over the past 12 months causing investors’ exposure to soar. Korea Teachers’ Pension is among those enjoying rampant portfolio growth of late. The 23 trillion won ($19.1 billion; €16.8 billion) institution reported a 34.3 percent 2021 return for its overseas alternatives portfolio on Monday, smashing its 14.7 percent benchmark and exceeding the next best performer, overseas equities, at 27.1 percent. Although KTP did not disclose the composition of its alternatives portfolio, PE accounted for about 6.9 percent of the overall fund, as of end-December. Its alternatives exposure – domestically and overseas – grew 15.7 percent last year to about $4.2 billion.

Shell sells to buy PE more?
Heady portfolio growth has contributed to a flurry of LP stake sales on the secondaries market in recent weeks. The corporate pension of oil giant Shell is among the latest to run such a process. The $17 billion scheme is offloading a portfolio of interests in 55 funds worth around $1.3 billion, affiliate title Secondaries Investor reports. This includes a $200 million piece of the 2008-vintage Blackstone Capital Partners VI.

Many LPs, including CalPERS, are taking advantage of a favourable pricing environment in secondaries to free up cash for newer vintages or to reposition their portfolios. This dynamic, which has been exacerbated by strong performance pushing some close to their allocation limits, might be bad news for the multitude of GPs coming to market – often with greatly increased targets – in 2022.

“We just don’t have the capital that all our managers want to invest, so we have to be really selective… [and] double down on managers we committed to before,” Teia Merring, investment director for PE at Universities Superannuation Scheme, told delegates at PEI’s Women in Private Markets Summit in December. “It’s going to be a real tough time for new managers to raise capital in this market because the majority of the capital will be allocated to safety.”


“Cover PE!”
If the latest quarterly earnings from PE’s listed giants tell us anything, it’s that permanent capital – in particular, insurance assets – are becoming an increasingly important source of capital. Blackstone’s insurance business, for example, more than doubled in 2021 to approximately $160 billion with the closing of the AIG and Everlake Life insurance mandates. Carlyle, meanwhile, expects a breakout year for its credit platform, thanks in part to its carve-out of reinsurer Fortitude, which has about $10 billion of fee-paying AUM, in 2020.

It is timely then, that McKinsey’s latest report explores the factors driving PE managers towards annuity and other life insurance providers. Here are some takeaways:

  • All five of the largest firms by assets have life insurance holdings, representing 15 percent to 50 percent of their total AUM
  • Such businesses can be unleashed on a firm’s credit business as a significant source of fee-related earnings, and can provide capital to act as a security or lending facility to fund deals
  • Within three years of their PE acquisition, 80 percent of insurers had increased their allocation to asset-backed securities (primarily collateralised loan obligations), and more than half of their investments were in private loans (compared with 37 percent for the industry)
  • Insurers have increasingly been refocusing into a capital-light, fee-based model, paving the way for more M&A opportunities

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

7 February

8 February

9 February

10 February

11 February

Today’s letter was prepared by Alex Lynn with Rod JamesCarmela Mendoza and Michael Baruch