Side Letter: Illinois Municipal’s alts target; sub line syndication; UK’s take-private slowdown

Illinois Municipal's alts appetite shows there's capital out there for GPs who know where to look. Plus: Why the sub line market hasn't closed to GPs despite a bank pullback; and how the UK's take-private market developed in 2022. Here’s today's brief, for our valued subscribers only.

Just happened

Ilinois Municipal: Bullish on alts (Source: Getty)

Room to breathe
Earlier this week, Side Letter noted that New York had granted public pensions the ability to invest a much larger proportion of their portfolios into private markets. Another US pension that looks set to do similar is Illinois Municipal Retirement Fund. In December, the $47 billion pension’s board of trustees approved a long-term asset allocation policy that would raise its alternatives target to 14 percent from 9.5 percent over the next three years. From 1 January, its target will be 11.5 percent.

That some LPs are giving themselves room to deploy more into alternatives is a sign of the times. Not only are many finding themselves overallocated to private assets, whose valuations have yet to come down in line with their public market equivalents, some are also looking to capitalise on opportunities relating to a downturn. “Candidly, when you look at all asset classes, private markets have been where you’re likely to see excess returns, making it a positive choice during uncertain times,” HarbourVest Partners co-chief John Toomey told Side Letter last year.

Of course, as we noted after New York’s legislative change, the billion-dollar question is whether private equity is a likely beneficiary of expanded allocations. Alaska Permanent Fund‘s chief investment officer Marcus Frampton, for instance, appears to have soured on PE and will consider reducing the fund’s allocation to the asset class next year due to high pricing. LPs are already rethinking the role of the asset class in a high-interest-rate environment, as PEI Group explored in its latest Spotlight podcast series.

Still, there are reasons for optimism. Almost a third (28 percent) of respondents in our latest LP Perspectives survey said they plan to invest more into PE this year. And as these examples in New York and Illinois show, there is capital out there for those paying attention to how different institutions are responding to market conditions.

Sub line syndication
The subscription credit line industry remains accessible to GPs even as large banks become more judicious about lending, our colleagues at Private Funds CFO report (registration required). Resiliency has been driven by a shift in the mix of participating lenders – with smaller banks and non-bank lenders using the vacuum left by incumbents to boost loan growth – and an active syndication component. Lender diversity is visible on the syndication side, with big banks increasingly finding smaller counterparts to join as participants while its relative role in taking on the sub lines shrinks.

“One thing that we are seeing is that some of the relationship banks are not able to hold the levels that they historically have in syndicated transactions,” noted Shelley Morrison, head of fund finance at abrdn, which acts as a syndicate lender. That phenomenon has meant syndicates increase in size.

Any pullback by existing large lenders could hurt their ability to retain their existing relationships, some say. Sub lines, which are a low-margin business, act as a gateway for banks to provide borrowers with ancillary, higher-profit services, such as transaction banking, collecting syndication fees and participating in leveraged finance as opportunities. One way they may adapt is by acting in administrative capacities for the syndicates while having smaller direct exposure, thus keeping their sponsor relationships alive.

Hunting for bargains
report by investment bank Peel Hunt sheds light on how the UK’s take-private market played out last year. Here are some key takeaways:

  • PE bidders were “almost entirely absent” in H2 2022 due to the low availability and high cost of debt.
  • The mean premium paid by PE bidders was 39 percent, substantially lower than the 58 percent paid by North American strategics.
  • The number of offer periods (47) that began in H1 2022 fell to 33 in the second half. By value, the number of transactions valued at more than £1 billion ($1.2 billion; €1.1 billion) dropped to 13 in 2022 from 20 the prior year.
  • While the most active houses have been the major global PE names,
    UK mid-market PE could become more prominent in take-privates.


Above and beyond
BeyondNetZero, the climate-focused unit of General Atlantic, has closed its first fund with around $2.6 billion in capital from external investors, our colleagues at New Private Markets reported this week (registration required). Combined with around $900 million in capital from GA’s flagship growth equity programme, the climate team has about $3.5 billion to invest in climate solutions, the firm said in December.

GA describes BeyondNetZero as a “companion fund, investing in climate growth equity companies alongside General Atlantic’s core global growth equity programme”. The core programme will generally contribute 25 percent of the capital to each of the climate investments made, assuming they meet its mandate. At $3.5 billion, BeyondNetZero has become one of the largest pools of climate-focused private equity capital in the market, behind Brookfield’s $15 billion Global Transition Fund and TPG’s $7.3 billion Rise Climate Fund.

Today’s letter was prepared by Alex Lynn with Helen de Beer and Madeleine Farman.