Side Letter: ILPA’s London calling; NB PEP’s exit slowdown; IPO? No thank you

Side Letter gets a front row seat (well, a back row one, if we're honest) at ILPA Summit Europe. Plus: IPO complexity is contributing to PE's rising influence over the real economy; and Neuberger Berman's listed trust saw realisations fall last year. Here’s today's brief, for our valued subscribers only.

Just happened

ILPA: London is the place for me (and our members)

LPs’ biggest concerns
Private markets’ most influential LP body is opening an office in London – its first outside North America. At the Institutional Limited Partners Association’s Europe 2023 Summit in the UK capital on Tuesday, PEI senior reporter Carmela Mendoza and senior editor Adam Le caught up with ILPA execs, including CEO Jennifer Choi, to get the lowdown on its latest bureau (slated to open in the third quarter) and what the industry body has been working on. Here’s what’s front of mind:

Regulation: ILPA has been engaging with the SEC since it released its proposed Private Fund Advisers rule in February 2022 to clearly articulate LPs’ perspective on several key points including the bargaining process and fund negotiation dynamics, according to Neal Prunier, ILPA senior director for industry affairs.

The lack of a level playing field is a central theme to many of ILPA members’ views, he noted. “Even if you are a large investor or a well-known LP, there are a lot of challenges that you face inherent in the industry based off a number of factors… The fact that [LPA terms have] shifted significantly towards the GP’s favour over the last couple of years and the consolidation of law firms, which has made the negotiation process that much more difficult… If you want to get anything, it’s typically needing to be done in the side letter, which is very inefficient.”

This despite the SEC wanting to create greater market efficiency, he pointed out. Prunier also noted that ILPA’s meetings with the SEC have been “very productive”. As far as final rules voted, that could potentially be this year, followed by a one-year implementation timeline.

Secondaries: ILPA has been working on specific guidance for LPs facing single- and multi-asset continuation fund processes in funds they’ve committed to. The guidance is set to come out next month and provides “guardrails” to ensure better dynamics between LPs and GPs, Prunier said.

The best practices are an update to the body’s 2019 guidance on GP-led secondaries, given the uptick in the use of continuation funds in recent years. “Some of the fundamental challenges with [continuation funds] were that the GP is on both sides of the deal, so there are some inherent conflicts of interest in [them],” Prunier said.

The guidance looks at such processes “holistically” and not just on pricing, for example, with a GP’s rationale being front and centre. It will also provide clearer definitions of what a true status quo option means for LPs who don’t want any changed conditions to their exposure to a given fund.

ESG: The nature of the conversations about ESG taking place in institutions internally and with external stakeholders differs in the US and in Europe, according to Choi. The challenge is particularly tricky when it comes to net-zero pledges and fossil fuel divestments, she said. “Those discussions… are being buffeted by political winds and the winds are blowing in two different directions in the US,” she said, adding that investment staff executing on their institutions’ ESG strategies are finding it challenging to navigate the environment, satisfy requirements and comply with legislation.

No to IPO?
We’ve written a lot this week – thanks in no small part to Partners Group‘s Steffen Meister – about the shifting roles of the public and private markets, with many companies now preferring to remain in the latter camp for longer. This trend is perhaps little surprise given complexities in the IPO process are causing a decline in the number of companies wanting to go public. That was one takeaway from a recent meeting of the capital markets subcommittee of the US House Financial Services Committee, our colleagues at Private Funds CFO report (registration required).

Members of the committee acknowledged that the breadth of the regulations in play are incentivising companies to remain private for as long as possible, causing the US IPO market to reach one of its lowest levels on record. Joel Trotter, co-chairman of law firm Latham & Watkins’ national office, noted in the meeting that some of these complexities include the fact that companies face further higher compliance burdens after IPO. One suggestion for tackling this issue is to expand the remit of the recently introduced Helping Startups Continue to Grow Act, which grants newly public companies ‘emerging growth company’ EGC) status for up to five years.

EGC status was created to ease small companies into the public markets and temporarily shield them from the full accounting and disclosure regime that accompanies SEC registration. However, many EGCs do not generate enough revenue in the designated five-year period to support their compliance costs – extending the period to 10 years could incentivise more companies to hold an IPO – members heard.

Other members of the subcommittee, however, cautioned against scaling regulations back too far. Melanie Senter Lubin, Maryland securities commissioner and president of the North American Securities Administrators Association, said private markets are “rife with scams and frauds because of their lack of transparency”. While Side Letter would argue that claim is rather unfair, regulators will no doubt need to strike a careful balance in any changes to the listing process.


PEP talk
Neuberger Berman Private Equity Partners, the listed PE trust, saw realisations fall to a five-year low last year, per its latest annual report. The $143 million realised marked a 63 percent drop from 2021 levels, which had been a five-year high. Last year’s distributions comprised of $89 million from seven full or partial sales, $13 million received from the sale of public stock, and $40 million of other portfolio realisations. The exits generated a 2.7x gross multiple of invested capital and a 6 percent uplift to 31 December 2021 value.

Its portfolio valuation multiples declined by two turns from 17.4x as of December 2021 to 15.2x at the end of 2022, reflecting lower public comparables amid market volatility. It also had an increase in net-debt-to-EBITDA multiples, which sat at 5.5x at year end, up from 5.2x in 2021. That increase included the “impact of the increase in debt used to finance M&A activity and some companies where EBITDA was affected by the operating environment, offset by strong operating performance and deleveraging”.

Slowing exit activity isn’t isolated to NB PEP. Last week, EQT said it was exploring alternative liquidity options such as partial sales or continuation funds as the IPO window swung effectively closed.

Lee’s latest close
Lee Equity Partners has raised at least $744.4 million for its most recent flagship since the tragic loss of founder Thomas Lee in February, per a filing from the US Securities and Exchange Commission. The New York-based mid-market investor has not disclosed a target for Lee Equity Partners Fund IV, though its predecessor closed on $803 million in 2020 with commitments from AlpInvest PartnersArcano Asset Management and Constitution Capital Partners, according to PEI data. Lee Equity Partners did not return a request for comment.

Fee-ling good
Endowus, a Singapore-headquartered digital wealth management platform, today expanded its services to Hong Kong. The platform aims to provide “conflict-free” “institutional-grade” advice to individual investors, with a low-cost model that doesn’t receive fees for recommending funds to its clients, executives from the platform noted at a media briefing this morning.

Among other traditional asset classes, Endowus will provide professional investors (which in Hong Kong is those with more than roughly $1 million in liquid assets) access to liquid alternatives from providers such as Partners Group, KKR and BlackRock. It plans in future to explore the possibility of closed-end offerings too.

Hong Kong has the highest wealth per adult in Asia, and is behind only the US and Switzerland globally. Endowus has already gathered $4 billion of assets under administration from Singapore since its establishment in 2017. It is backed by UBS, SoftBank Ventures and Samsung, among others.

Today’s letter was prepared by Alex Lynn with Adam LeCarmela Mendoza, Helen de Beer, Madeleine Farman and Katrina Lau