Side Letter: ICG’s $5bn bet on GP-leds; ESG’s legislative headwinds; China’s token test

The biggest ever pot of capital has been raised to back GPs selling assets to themselves. Plus: Legislative action in the US reminds us that what can seem like an inexorable march towards sustainability is not quite that simple; and the tokenisation of private markets has taken another step forward, this time in China. Here's today's brief, for our valued subscribers.

Just happened

ICG’s record fundraise: Evidence LPs are bullish on the strategy (Source: Getty)

In defence of continuation funds
There’s been a bit of commotion in recent days about the “phenomenon” of private equity firms selling assets to themselves. This hot trend (which, for what it’s worth, Private Equity International and our colleagues at Secondaries Investor have been reporting on for the better part of the past decade) involves moving assets out of existing funds into continuation vehicles, managed by the same sponsor – a process that can deliver liquidity for LPs and reset economic terms (and therefore incentives) for the GP. The FT has coverage here and here (subscription required).

This strategy hit a milestone this week with the news, broken by Secondaries Investor, that London-listed ICG had raised more than $5 billion for a dedicated fund to back such deals (registration required). The vehicle, Strategic Equity IV, is the largest pool of capital ever raised for such transactions and shows that investors of the likes of the California State Teachers’ Retirement SystemLos Angeles City Employees’ Retirement SystemNew York City Employees’ Retirement System and Oklahoma State Regents For Higher Education reckon this is a strategy worth backing.

It hasn’t always been this way. When it was rumoured in 2016 that ICG was planning to raise a dedicated fund for such deals, market sources expressed doubt that the type of vehicle would chime with LPs. Today, it’s a market worth around $62 billion in deal volume, according to data from Greenhill.

ICG’s latest fund is understood to be 60 percent committed, meaning the manager is likely to be back on the fundraising trail sometime soon. The firm offers exposure to high quality assets via brand name managers such as TPGClearlake CapitalWaterland Private Equity and Providence Equity Partners, something market sources say can be tricky for some LPs to access via co-investments or primary fund commitments. Yes, issues such as managing conflicts of interest, price discovery and fairness opinions are important in ensuring such transactions are conducted fairly, but ensuring alignment for all parties involved in a given transaction is key to their success. Are the continuation fund market’s days numbered? We suspect they’re not.

ESG’s headwinds
In 2022, having an ESG policy should be ‘table stakes’ when it comes to raising LP capital. And yet, a recent survey of 59 private fund managers – mostly in PE – by PineBridge Investments found that 20 percent of North American respondents still did not have a policy. Beyond the realm of private markets, anti-ESG sentiment in some US states has coagulated into laws designed to put a stop to it, as our colleagues at New Private Markets and Responsible Investor have noted (registration required). The most recent example is in West Virginia, where state treasurer Riley Moore this month wrote to six financial institutions, including Goldman Sachs and BlackRock, to inform them that, unless they can prove they are not boycotting the fossil fuel industry, they will in effect be outlawed from doing business with the state.

Similar laws centred on fossil fuels have been enacted in Texas and Oklahoma, and 15 US states in total have said they intend to put institutions “on notice” if they boycott fossil fuels. In Idaho, the equivalent rule is further reaching: a bill set to come into effect in July will ban “public entities engaged in investment activities” from considering environmental, social, or governance characteristics “in a manner that could override the prudent investor rule”.

All this is not to paint a picture of North American private markets as an ESG-free zone. On the contrary: some of the most significant market-shaping sustainability initiatives, including various projects to standardise ESG reporting and institutionalise impact investing, have emerged from the region. It is also leading the way globally on DE&I action at the manager level. So, there may well be headwinds (and more of them) but ESG enthusiasts should take heart – progress is still being made.

They did the math

Asia’s deal decline
Asia-Pacific deal volumes fell in May as macroeconomic uncertainty crept into the market. There were 1,161 M&A, PE or venture financing transactions last month, down from 1,330 in April and marking a roughly 26 percent decline from the Q1 average, according to GlobalData. PE dealmaking had the biggest decline at 21.8 percent between April and May, versus 15.5 percent for M&A and 9.9 percent in VC. Japan and China had declines of 14.8 percent and 42.7 percent respectively, while Australia, Hong Kong and India were the only markets to post growth.


China tests token waters
Another day, another development in the land of tokenisation (see Wednesday’s Side Letter for more on this strategy). ADDX – a pioneering platform for private markets tokenisation – this morning made further headway in democratising PE fundraising and bringing Chinese capital to Western PE markets.

The Singaporean business has partnered with the China Construction Bank to help invest a $200 million allocation under the Qualified Domestic Limited Partnership scheme, which enables sophisticated Chinese investors to buy into renminbi funds that focus on overseas investment opportunities, including private markets. CCB will act as custodian (a legal requirement in which it is responsible for ensuring the investments are eventually channelled back into China), although the partnership opens the possibility of CCB distributing the fund to various end investors, whether individuals or institutional.

The QDLP programme, though comparatively small in scale, has exciting potential for PE fundraisers. The detail and scope vary among the QDLP programmes launched in different locations (ADDX’s allocation, for example, was granted by the Chongqing government), but most permit investment into overseas public markets either directly or through offshore master funds, per law firm Simmons & Simmons. In practice, QDLP managers raise capital through a feeder fund and feed it into their overseas master fund.

BlackRock and KKR are reportedly among the firms to have secured allocations under the programme. Their success is particularly notable given the decoupling between the US and China in recent years, which has also led to substantially lower demand among Western investors for China exposure.

LGT’s Asia close
While we’re on the subject of Asia, just before Side Letter went to press, LGT Capital Partners revealed the final close of Crown Asia-Pacific Private Equity V on its $1.65 billion hard-cap and above its $1 billion target. More than 50 institutions committed. Fund V is 65 percent larger than its predecessor, which closed on $1 billion in 2019.

Today’s letter was prepared by Alex Lynn with Adam Le and Toby Mitchenall