Side Letter: KKR’s 2021 macro view, LACERA stresses the ‘S’ in ESG

It looks like sustainability (in various forms) will be a big winner from the global pandemic. Investors will be less tolerant of managers who don't consider their wider impact, while governments' fiscal looseness will provide an ESG boost, notes KKR's asset allocation chief Henry McVey. Here's today's brief, for our valued subscribers only.

They said it

“I came to the conclusion… probably about two years ago, that actually the fund structure really didn’t particularly suit me for two reasons. One is I’ve always enjoyed putting my own money to work more than anything else and I wanted to be able to do that, really focus on that. And secondly, I didn’t really want to be travelling around, pitching myself, any more; I sort of felt old enough and ugly enough to stop pitching myself and I wanted to really pitch deals.”

Guy Hands, founder of private equity firm Terra Firma, tells Reuters Breakingviews about the firm’s pivot to deal-by-deal investing.

Just happened

Stressing the ‘S’
The pandemic has not stifled investors’ interest in ESG. According to our data, it has strengthened it. For a live example look to Los Angeles, where two board members of the Los Angeles County Employees’ Retirement Association have said they would favour a boycott of future PAI Partners’ funds after reports of negative relations between a portfolio company and laid-off workers.

The company, Areas USA, runs concessions at several US airports. It has laid off many of its workers due to the massive hit air travel has taken during the coronavirus pandemic, Justin Mitchell reports on sister publication Buyouts (registration or subscription required). Laid-off workers and their union, Unite Here, have been coming to LACERA for months to ask the $60 billion pension to push the company to engage with them about providing continuing healthcare coverage to laid-off workers.

Said David Green, chair of the LACERA board: “I would recommend when the time comes to not re-up with PAI and Areas. It seems like we haven’t made progress and we’ve actually taken steps back.”

Said PAI in a statement: “PAI Partners takes its duty as a responsible investor and owner of businesses very seriously. Areas, like many other companies in the travel sector, was negatively impacted as a result of covid-19 and PAI fully supports the company and the actions taken by the management team in its efforts to navigate the unprecedented circumstances.”


Persistent performance
Buyout funds in US and Europe suffered less than their public markets counterparts in the first two quarters of 2020, according to eFront’s Private Equity in the Covid-19 Year report. Conversely, they did not enjoy the same improvement as public markets in Q2, as the long-term effects of covid-19 lockdowns showed in portfolio companies’ operations.

KKR: What to be bullish on in 2021
“The punch line for the next 12-24 months is that the growth environment is going to feel quite good,” writes KKR’s Henry McVey in his latest macro report. More stimulus and a snapback in consumer spending will all likely be in play. McVey identifies six themes for 2021:

  • Rise of the global millennial: The cohort born from 1980-94 are now becoming a global spending force. “We now look for these individuals to reshape many traditional consumer markets, particularly as it relates to financial services, healthcare and technology.”
  • A renaissance in big government (with ESG benefits): “As part of the trend towards higher fiscal outlays, we think that almost all aspects of ESG are winners, including water cleanliness, energy transition (solar, wind and other renewables), climate and resiliency (eg, grid). Also, watch for an increased focus on telelearning, telemedicine and workforce training.”
  • Asset-based cashflow enters a super cycle: Now is the time to overweight positions in asset-based finance credit, infrastructure, logistics and parts of real estate. “As we look ahead, we have high conviction that we are still in the early innings of a structural upward re-rating in collateral-based assets that can generate a competitive upfront yield without too much leverage.”
  • Local bias preference: Local technology and services champions could be an even more fertile area for investment. “We believe that rising nationalistic sentiment combined with a post-covid focus on redundant, reliable and resilient supply chains for critical products will lead to more local bias in terms of both consumption and production (ie, expect global capex to surprise on the upside), which has important implications for global supply chains, global trade and capital flows.”
  • Embracing dislocation: Volatility will continue into 2021. “This backdrop makes us bullish, as it presents global allocators of capital with opportunities to take advantage of dislocations and dispersion.”
  • Secular vs cyclical: Yes, while KKR is positioning its portfolio for a more cyclical 2021, secular trends will retain their relevance. “Indeed, given all the seismic changes that have taken place in healthcare, security, software and consumerism, we still want to be long disruptors.”

Dig deeper

Institution: Virginia Retirement System
Headquarters: Richmond, US
AUM: $85.1 billion
Allocation to alternatives: 24.2%

Virginia Retirement System confirmed $400 million-worth of commitments to two private equity funds at its December 2020 board meeting, a contact at the pension informed Private Equity International.

The commitments comprised $300 million to Ares Private Credit Solutions II and $100 million to Charlesbank Equity Fund X.

VRS has a 13 percent target allocation to private equity, which currently stands at 13.5 percent.

The $85.1 billion US public pension’s recent private equity fund commitments have concentrated on diversified sector funds focused on either global or North American investments.

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

Today’s letter was prepared by Toby Mitchenall with Carmela Mendoza.

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