It’s safe to say that private equity fundraising has gone a little crazy this year. What’s less certain, however, is exactly what this dynamic could mean for the wider asset class and LPs. That’s the question Private Equity International sought to answer in a mini deep dive into this year’s fundraising frenzy. In a series of articles published throughout this week, we’ll look at the potential implications for LP returns, fund terms, talent and next year’s fundraising schedule. While you wait, here are a few key takeaways from the series:
- Returns: While the number of mega-funds in market at the same time has sparked concerns over diversification (or, more specifically, a lack thereof), this could actually be desirable leading into a recession.
- Timelines: Next year could be just as strained, with fundraising processes that are being extended into 2023 potentially eating up allocations that would otherwise have gone towards 2023-vintages.
- Investor bases: Capacity constraints among institutional investors may well catalyse efforts by GPs to access non-traditional sources of capital.
- Talent: The strain on resources will require institutional investors to become more competitive on bonuses and compensation when attracting and retaining the requisite talent.
The California Public Employees’ Retirement System has sold a multi-billion-dollar portfolio at a discount, potentially giving the green light to other LPs mulling the same course of action. Secondaries firms Lexington Partners and Glendower Capital acquired the portfolio at a 10 percent discount to 30 September valuations, according to Bloomberg. CalPERS used structuring to get comfortable with the haircut, deferring some of its payment to allow it to continue to benefit from cashflows generated by part of the portfolio.
Our colleagues at Secondaries Investor reported (registration required) in March that Lexington was set to buy the portfolio. The sale is central to the pension’s plan to cut its list of GP relationships and shift its focus to concentrated interests, separately managed accounts and co-investments. Tail-end stakes (funds at least 10 years old) made up a significant portion of the transaction, which ended up being less than $6 billion in size, PEI understands.
Many public pensions have been considering offloading PE stakes to free up cash to reinvest. Its outperformance last year has caused these institutions to become overallocated just as a raft of firms return to market targeting larger and larger sums. LPs have largely held back from selling due to an unwillingness to transact at the discount expected by buyers to reflect the steep decline in public market comps that has taken place in 2022.
“A large optical discount is always hard. It’s emotionally difficult for anyone to stomach. It takes a very sophisticated seller to really remove themselves from the discount discussion and look at it entirely from an economic perspective,” said Oliver Gardey, head of the private equity funds group at ICG, in May. Now that one of the world’s biggest pensions has bitten the bullet, others may well be emboldened to follow.
US retail specialist Sycamore Partners lost one of its two founding partners, Peter Morrow, earlier this year, our colleagues at Buyouts reported last week (registration required). The move could have an impact on the firm’s efforts to raise its next flagship fund, which was expected to start next year. It’s unclear why Morrow left the firm, though sources said he plans to launch his own shop.
It is also unclear if Morrow’s departure triggered a key-person event in Fund III, which closed in 2018 on $4.75 billion. When a key-person event occurs, a fund often either automatically, or by LP approval, loses its ability to make new investments. LPs can then grant the fund permission to continue, usually after a new leadership slate is approved. Many firms pre-empt the actual triggering of a key-person provision by pre-negotiating with LPs. L Catterton’s Asia unit, for example, made changes to the key person clause on its third flagship fund prior to a number of senior departures, PEI reported in 2020.
Cinven’s strategic close
Cinven has gathered €1.5 billion for its debut Strategic Financials Fund, per a statement. The firm began raising capital in 2020 and has made three investments so far from the vehicle, which is one of the largest pools of capital dedicated to financial services in Europe. Financial services funds are among the top five most attractive sectors for LPs, according to a recent survey from Probitas Partners. Cinven is still in market with its latest flagship, for which it is seeking more than $12 billion, according to a report from Bloomberg.
Earlybird gets the worm
Vincenzo Narciso, former head of investor relations at Rhône Group spin-out Px3 Partners, has joined Berlin-based Earlybird Venture Capital, per a statement. Narciso, one of four founding partners at Px3, leaves the firm as it seeks at least €750 million for its inaugural fund. Prior to Rhône, Narciso was MD at Carlyle for five years and, before that, head of private markets at UBS. Side Letter understands that he remains an investor in Px3.
His new employer, Earlybird, launched its fifth growth opportunity fund in June with a €300 million target and reached a first close two weeks ago, Narciso tells us. He expects to swell the firm’s mostly-DACH based investor pool with a handful of international LPs and will add another two new hires to its IR team.
LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.
- Los Angeles County Employees’ Retirement Association
- Marin County Employees’ Retirement Association (MCERA)
Today’s letter was prepared by Alex Lynn with Rod James and Carmela Mendoza