Side Letter: JC Flowers founder backs SEC ‘leveller’; KKR departure; Oregon’s problem

Chris Flowers, one of the most recognisable names in financial services investing, shares his thoughts with Side Letter. Plus: The woman who led the creation and growth of KKR’s client and partner group is leaving the firm and Oregon State Treasury has become a victim of its own private equity success. Here's today's brief, for our valued subscribers only.

They said it

“There are some really earth-shattering questions that start to target and hit very well-established industry terms and conditions that have been widely accepted over decades”

Speaking on a Wednesday webinar, Jedd Wider, a partner at Morgan Lewis, says the US Securities and Exchange Commission’s latest private fund proposals cut to the core of PE. More here.

Just happened

Flowers in bloom

Chris Flowers is someone who knows a thing or two when it comes to private markets investing and financial regulation. In a conversation with PEI this week, the JC Flowers founder and veteran fin services investor shared his thoughts on a range of topics, including the US Securities and Exchange Commission’s recent proposals for private funds.

“Having a level playing field which is seeking to protect investors will provide transparency and makes sense,” Flowers said. While there might be some areas of the proposals that could be over-prescriptive, holding the people who are investing other people’s money to high standards should benefit underlying investors, he added.

“There is less scrutiny on private companies than there is on public companies and there’s some sloppiness there. I think that is a quite sensible area for the SEC to be paying attention to,” Flowers said.

A few other key takeaways from our conversation:

  • The firm has made several investments since the start of the pandemic, none of which were “children of the pandemic” assets (ie, not bought due to pandemic-induced opportunities).
  • It has an “active” Fund IV. Flowers declined to comment on Fund V, which is understood to be wrapping up its fundraise with an undisclosed target.
  • The firm would consider running a GP-led secondaries process on its assets, Flowers said, though there are no immediate plans. In 2016, it ran a secondaries process on its JCF Fund II and NIBC Fund, backed by Coller Capital.
  • A rising interest rate environment would be a boon for financial services investments. “Many of our companies are really lenders,” he said. “Rising rates and a steeping yield curve really can help.”

Donohoe’s gonna go

Suzanne Donohoe, who led the creation and growth of KKR’s client and partner group, is leaving the firm, affiliate title Buyouts reports (registration required). She will leave in March after a transition period for an undisclosed destination and will remain a senior adviser to the firm. Donohoe, who joined the firm in 2009, moved out of the client and partner group in late 2020 and into a role as head of strategic growth. She co-chaired the firm’s Inclusion & Diversity Council, of which she was a founding partner in 2014. In a 2020 statement, KKR said Donohoe and her team raised more than $225 billion from a global client base.

Oregon’s ‘universal problem’

Oregon State Treasury is in some ways a victim of its own success. The 41.8 percent return generated by its $25 billion PE portfolio last year has created something of an allocation headache – a “universal problem in private equity investors of scale,” Tom Martin, global head of PE at consultancy Aksia, told council members during a 26 January meeting. Oregon’s PE allocation stood at 26 percent as of December, just inside its 28 percent ceiling. It deployed $3.6 billion in 2021, above its $2.5 billion to $3.5 billion target range.

Like many of its peers, Oregon has turned to the secondaries market to offload certain vintages within its portfolio – a process that could become more challenging in the medium term, according to OST’s private markets director Michael Langdon. “We don’t want to be forced into a buyers market,” he said. “All you are ever doing when you are placing this stuff in the secondary market is pulling forward distributions. And in every trade, at either a premium or discount, there are frictional costs – it’s not free. We have to balance what we give up. If we have a strong feeling that the distributions are coming, the better choice is to wait it out.”


Shooting for zero

Two more sizeable LPs have thrown their weight behind decarbonisation efforts this month. The UK’s Universities Superannuation Scheme expects to invest up to £2.5 billion ($3.4 billion; €3 billion) in decarbonisation technologies and services in private markets over the next five years, affiliate title New Private Markets reports (registration required). It has allocated £500 million to invest in 2022 and expects to deploy the same amount for each of the following four years, in a move intended to support its target of net-zero carbon emissions across the portfolio by 2050. It is joined in the latter by Sampension, a DKr295 billion ($45 billion; €40 billion) Danish pension pool, which also unveiled a 2050 net-zero goal this month.

The duo’s pledges come shortly after the Institutional Investors Group on Climate Change released PE-focused guidance for its Net Zero Investment Framework: the first guidance for LPs and GPs to align their portfolios to net-zero carbon emissions by 2050, NPM reported this month. “When it comes to net zero, private equity is currently a blind spot for institutional investors,” Stephanie Pfeiffer, chief executive of IIGCC, said at the time.

Wafra appointment

Investment firm Wafra, which forms part of GP seeding platform Capital Constellation, has named Adel Alderbas as chief investment officer, per a statement. He replaces Russell Valdez, who served for more than a decade at the firm. Valdez will remain a senior adviser as he moves to his “next chapter as an entrepreneur”, he said on LinkedIn. Alderbras, a 15-year veteran of Wafra, was previously deputy CIO and played a key role in the growth of the firm’s alternative investments across strategic partnerships, real estate, infrastructure and real assets.

A PEI interview with Valdez from 2020 includes some pearls of wisdom for how firms might want to treat his successor. “All LPs work with multiple managers, so they are getting to see what is happening in many industries,” he said. “Frequent reporting and updates will help an LP provide more value to that LP’s CIO, helping to inform deployment of capital in the private equity bucket for the remainder of the year. Overcommunication engenders goodwill and a real spirit of partnership.” GPs take note.

Dig deeper

Institution: Connecticut Retirement Plans and Trust Funds
Headquarters: Hartford, US
AUM: $44 billion
Allocation to alternatives: 22.9%

Connecticut Retirement Plans and Trust Funds has approved $250 million in commitments across two Clearlake Capital Group managed funds, according to the pension’s February meeting minutes. The pension will invest $125 million each in Clearlake Capital Partners VII and Clearlake Opportunities Partners III.

CRPTF has previously invested in other Clearlake Capital Partners’ funds. The pension invested $75 million into its predecessor fund Clearlake Capital Partners VI.

The $44 billion US public pension’s recent private equity commitments have included predominantly North American and global focused vehicles.

For more information on Connecticut, as well as more than 5,900 other institutions, check out the PEI database.

Today’s letter was prepared by Alex Lynn with Adam LeCarmela Mendoza and Michael Baruch