Side Letter: IPEM 2022 takeaways; Ham Lane seeks control; Branding LP comms

Key talking points from Cannes this week. Plus: Hamilton Lane is seeking more control over its China investments; and Whitehorse Liquidity Partners is helping GPs fund their operations. Here's today's brief, for our valued subscribers only.

Just happened

Heard on the French Riviera
Side Letter‘s Carmela Mendoza and Adam Le have been in Cannes this week for IPEM 2022. Here are some of the key talking points from the Croisette:

  • Democratisation: For this to work, the structure should be adapted to address pain points – including admin complexity, fee transparency and shorter fund durations – without the fundamental offering watered down, said Joana Rocha Scaff, Neuberger Berman‘s head of Europe PE. This means GPs need to give retail investors access to the same high-quality products they are offering institutional investors, she added.
  • Equity to credit: Expect more investors to revisit their asset allocation in order to have more private credit and secondaries in their portfolios, Jim Garman, head of EMEA alternatives at Goldman Sachs, said.
  • Extending ownership: PE firms will keep hold of their prized assets for longer via the GP-leds market. These firms must ensure the move is in the best interest of LPs and that investors have enough time to make a decision on the matter, said Rocha Scaff.
  • Bifurcation: Valuation multiples will compress in a rising-rate environment, while value creation more than ever needs to come from revenue and earnings growth. Highly specialised GPs with functional capabilities such as data science or analysis are expected to stand out.

Ham Lane seeks control
PE’s response to heightened uncertainty in China has been mixed. Some, like Houston Firefighters’ Relief and Retirement Fund, have decided to slow their commitment pacing and reallocate to other markets in Asia-Pacific (more on that here). Others, like Hamilton Lane, are seeking greater control in their China investments. Speaking at SuperReturn Asia in Singapore this week, Mingchen Xia, managing director and co-head of Asia investments at Hamilton Lane, said the firm still had long-term confidence in China’s growth opportunity, but may need to alter its strategic approach.

“I think in the last 10, 20 years, growth capital [and] venture capital has been a very mainstream strategy and also generated pretty nice returns for LPs,” he said. “But I think going forward, given all those uncertainties we’re facing on the covid side and the geopolitical tensions… we need to do more… control deals or… buyout funds in China, because those investments are less reliant on the IPO market, which is very uncertain now. And also you have more control on the destiny of the exit and you have more chance to create value operationally.”

Exit uncertainty has already prompted some China GPs to incorporate downside protection mechanisms into their dealmaking processes, as Private Equity International reported in March. “In the deals that we came across, we have seen an increased number of PE investors, when making a new investment, taking the time to negotiate more rights to get the maximum flexibility in their future exits,” said Maureen Ho, a partner at law firm Morrison & Foerster. “That [can] include asking to invest in the form of [a] convertible debt instrument, asking for put options, minimum returns, exit demand rights and the ability to structure alternative exit strategies like transfer of economic interest associated with the equity in the portfolio.”


Branding your LP communications
With fundraising only getting more competitive and LPs expecting more professionalised management companies and processes in their communications and reporting, some managers are viewing fundraising almost as a continuous process, our colleagues at Private Funds CFO report (registration required). “The firms that will grow the fastest – we can pretty reliably predict this – are those [that] understand that fundraising is a team sport, and that fundraising never stops,” one unnamed CFO said. What is key, they added, is asking yourself how you can make sure that every touchpoint LPs have with your firm – from IR, to compliance, to the GP, to the fund administrator – is branded with the firm’s message: “What’s the one thing you can say about your firm to a LP that no one else can say?”

Firms need to ensure that every member of the team, whether a partner or a finance director, is on the same page when it comes to LP communications, said another CFO. When so many meetings with LPs are done virtually it can be harder to build trust, so having a clear and uniform presentation “makes a huge difference in having a successful fundraising process and in building that trust”, said the first CFO.

Preferred partner
Preferred equity specialist Whitehorse Liquidity Partners has raised a fund aimed at helping general partners fund their operations. Liquidity Partners GP Solutions Opportunities Fund closed on $400 million, exceeding its target of $350 million, according to a statement from the Toronto-headquartered firm. The fund will make preferred equity investments in GP management companies, an extension of a strategy that Whitehorse employs out of its flagship vehicles, our colleagues at Secondaries Investor report (registration required).

“GPs are increasingly seeking ways to access capital outside of traditional sources and to manage their own balance sheets,” said partner Michael Gubbels in the statement. Whitehorse is expecting an increase in demand for preferred equity financing from GPs and LPs due to the challenging geopolitical and macroeconomic environment.

Today’s letter was prepared by Alex Lynn with Carmela Mendoza and Adam Le.