Side Letter: Hg’s $17bn (and counting); Dyal’s fishing funds; Apollo’s S3 launch

Software-focused giant Hg has collected roughly $17 billion across two funds – one of which is still in market. Plus: Dyal founder Michael Rees seems to be fishing in deep waters with his latest GP stakes fund. Here's today's brief, for our valued subscribers only.

Just happened

Hg: Rocketing past Saturn 3’s target (Source: Getty)

Hg reaches for the stars
In March, we brought you the news that London-headquartered Hg was making headway across two fundraises eyeing more than $15 billion in total. Side Letter has since learned that the tech-focused investor has closed on more than $16.6 billion and could be set to raise more.

Hg’s Saturn 3 fund, which launched in October, has raised more than $11 billion and its mid-market-focused Genesis 10 fund has raised over €5.5 billion and is already fully subscribed, according to a source familiar with the firm. Saturn 3 is expected to hold its final close this month, while Genesis 10 , which has a €7 billion hard-cap, is continuing to raise capital, we understand. Hg declined to comment on the progress of its fundraises.

Thanks in part to progress with these two funds, Hg is now Europe’s third-largest fundraiser after EQT and CVC Capital Partners and 17th globally, having oscillated between 30th and 90th in the PEI 300 over the past decade. With tech stocks dropping roughly 17 percent since the beginning of the year and some tech-focused PE firms rumoured to be facing fundraising hiccups, Hg’s momentum is noteworthy.

Fishing in deep waters
GP stakes sceptics – few and far between as they may seem nowadays – have long pointed to what they believe must be a limited pool of investable targets. To some extent, their logic is sound: after all, GP stakes investors presumably only want to back upper-quartile managers that can consistently grow their AUM, while avoiding firms that directly compete with those in the existing portfolio. That must leave a finite number of established firms to pursue, even before considering whether or not they’re willing to sell.

Those within the sector, naturally, are more sanguine about the opportunity set. Michael Rees, co-president of Blue Owl Capital and head of its pioneering GP stakes unit Dyal Capital, told our colleagues at Buyouts this week that the investable universe is expanding faster than funds can deploy capital (registration required). Calculating market size by enterprise value, Rees said, is more accurate because it takes in both new and existing investments. In mature GP stakes portfolios, a significant opportunity lies within re-investments; three of Dyal’s most recent investments – Dragoneer, KPS Capital Partners and Veritas Capital – fall into this category.

By EV, the GP stakes market is growing by roughly 10 percent a year, Rees said, noting that it is estimated to reach about $530 billion this year and $749 billion by 2025. “The fish are reproducing faster than we can pull them out of the pond,” he added. That is just as well, because – as Rees noted in Blue Owl’s recent Q2 earnings call – Dyal is on the verge of wrapping up the biggest GP stakes vehicle on record; Fund V, targeting $9 billion, has so far secured $10 billion. By any measure, that’s a lot of fish.

They said it

Emerging market appetites
Fears that an impending recession will dent appetites for emerging markets so far have yet to materialise. Private capital investors deployed $126 billion across 3,110 deals in emerging markets in the first half of this year, the second highest H1 total on record, according to data from the Global Private Capital Association this morning. Latin America and Southeast Asia had the biggest year-on-year increases, at 43 percent and 39 percent, respectively.

Chinese deal value, meanwhile, fell 37 percent as regulatory uncertainty and pandemic disruption contributed to diminished investment activity.


Apollo’s buildout
Partnering with GPs to solve problems is the name of the game for S3, Apollo Global Management’s sponsor and secondaries solutions business. It can offer primary fund capital, and this is likely to be “in combination with other investments at the GP level and various strategic support”, co-president Scott Kleinman told our colleagues at Secondaries Investor (read it on PEI here). “Fund seeding may be accompanied by capital markets support, or a holdco loan, or lending against an earlier vintage fund,” he said. “Just going out and being a $10 million LP in 100 different funds is not the baseline target opportunity.”

There have been some large acquisitions of secondaries firms by the likes of Ares ManagementCVC and Franklin Templeton over the past 18 months. “We, as you can imagine, looked at all those,” Kleinman said, but the firm felt it had most of the tools in house which it has “supplemented with some very attractive hires”. “The market certainly is growing fast enough where there’s room for another scale player, so we are very excited about this opportunity,” he said. “I expect Apollo is going to be a very meaningful player in this in the coming years.”

Pollen count
UK financial services specialist Pollen Street has recruited a business development executive and partner for North America, per a statement. William Tice, a former president at Vida Capital, is based in Texas and will be responsible for deepening the firm’s existing US relationships and increasing its profile and capital partnerships in the region, he tells Side Letter. The firm, which is one of the latest to become public, has been active in the US for five years.

Today’s letter was prepared by Alex Lynn with Adam LeCarmela Mendoza and Madeleine Farman