Just happened

Insight’s tech insights
It’s been a chastening year for company founders, many of whom have experienced a dramatic decline in the value of their businesses and, by extension, their own wealth. Over the summer, Private Equity International spoke with Jeff Lieberman, a partner with software giant Insight Partners, whose last flagship fund closed on $17.23 billion in February. Having experienced a few downcycles over his 24 years with the firm, Lieberman shared some advice for GPs and portfolio companies hoping to steel themselves against such a difficult environment.

• Higher interest rates mean a higher cost of capital, which in turn means that growth without profitability is out and prudence is in. “[Businesses should ask] how do we do what we’re doing on a more efficient basis? Your objective function was growing as fast as you could. Now your objective function is to grow efficiently, which means balancing the top line with the bottom line.”
• If they can, companies should work towards being “fully funded forever” where raising capital is an option and not something they do in response to a shortfall. If they can’t, they should try to ensure that unit economics are as attractive as possible.
• “If one and two [above] aren’t true, then I think you have to look honestly at the business and say: ‘If we’re not there today, can we get there?’”

Look out for the full interview on PEI in the coming days.

To be continued…
Deutsche Private Equity has become the latest firm to run a continuation fund on its assets, our colleagues at Secondaries Investor report this morning (registration required). AlpInvest Partners is leading a consortium that includes HarbourVest Partners and Pantheon to back a roughly €750 million deal to move two assets out of the Munich-headquartered firm’s 2016-vintage DPE Deutschland III into a separate vehicle. It is not clear which companies are involved, though they are understood to be in the IT sector. The transaction is signed and is set to close in early October.

The deal appears to be the first continuation fund for DPE, which has €2 billion in assets under management. Last month, the firm’s co-chairman and founder, Volker Hichert, told German magazine Unternehmeredition that the firm, which had not set up a continuation fund at that point in time, was working “intensively” on the subject. “We have already considered which companies would be particularly suitable for our portfolio,” he said, as translated from German. “We definitely see this innovation as very positive and we are sure that we will do it in the future.”

On the subject of GP-leds…
European fund of funds manager Hermes GPE is one firm taking a closer look at the opportunities arising from PE’s diminishing illiquidity. “One of the biggest issues [in PE] has been this mistaken belief that this is an asset class where you get stuck into it and you have to be in fund[s] of funds for 15 years,” Elias Korosis, partner and head of growth investing and strategy, tells Side Letter. “This is not the case, because you can engineer liquidity solutions every five years and provide very substantial liquidity for people to redeploy [capital].”

London-headquartered Hermes, which is known for investing assets of the UK’s largest corporate pension scheme, BT, is eyeing GP-led situations with interest, Korosis notes. With the vast majority of LPs (90 percent) opting to sell in continuation deals in the first half of this year, Hermes should find plenty to choose from.

Essentials

Continental capital
European PE assets under management reached a record €846 billion in 2021, up from €754 billion in 2020, according to an Invest Europe report this morning. Here are some other findings:

• About 34 percent of this capital was unspent as of December.
• Buyout funds had €181 billion to deploy, representing 64 percent of Europe’s dry powder. VC funds had €42 billion.
• UK and Ireland-headquartered funds held the most dry powder at 45 percent, followed by France and Benelux at 28 percent.
• 2017-21-vintages make up 88 percent of available dry powder.
• Pensions accounted for the largest share (27 percent) of uncalled commitments, followed by fund of funds and other asset managers (19 percent) and family offices and private individuals (13 percent).

ESG’s liability load
“Irreparably screwed up” – that’s how one market reform advocate described the US Securities and Exchange Commission’s proposed ESG disclosure rules. In a Twitter thread, reported by our colleagues at Regulatory Compliance Watch (registration required), chief executive of the Healthy Markets Association Tyler Gellasch, said the proposed rules, if adopted in a form “even close” to how they are currently written, “will add complexity, costs and liability – and hinder ESG investing and ESG-factor consideration”.

The rules are too conditional and not prescriptive enough, Gellasch argues; they don’t require private fund advisers to consider ESG as part of their fiduciary duty and would only apply to “ESG-focused” investments, which would make sponsors less likely to designate their investments as such. “Suppose… I run a clone S&P 500 index fund,” he said. “I don’t really invest based on ESG factors… I won’t volunteer to take liability as ‘ESG focused’. But suppose, further, that I decide to vote for a climate disclosure proposal at an oil company… Did I just make an ESG decision? Yes. Did I do that on a factor I didn’t disclose? Yes.”

Of all the proposed SEC regulations, those around ESG- and climate disclosure are the biggest concern among sponsors, according to a survey conducted by consultancy and accountancy firm EisnerAmper. As Side Letter noted previously, the regulations are intended to clamp down on “materially false and misleading statements or omissions” with regard to a fund’s ESG credentials.

Today’s letter was prepared by Alex Lynn with Rod James and Carmela Mendoza