Side Letter: KKR’s E&F ‘overhaul’; ARK’s retail push; Investcorp’s GP stakes close

KKR believes endowments and foundations may need to overhaul their business footprint to continue generating stellar returns. Plus: Cathie Wood's ARK wants to access retail capital with its new venture fund and Investcorp has closed its debut GP stakes fund. Here's today's brief, for our valued subscribers only.

Just happened

Endowments and foundations: Considering a new approach? (Source: Getty)

KKR’s LP learnings
It’s not unusual for LPs to make suggestions to their GPs about ways to improve their businesses. What’s a little more rare, however, is for GPs to give investors advice on how best to run their organisations. Enter: Henry McVey, KKR‘s head of global macro and asset allocation and chief investment officer for the firm’s balance sheet, who on Wednesday published the results of a survey it conducted of more than 30 CIOs of endowments and foundations. The bottom line: “If these entities are to maintain the superior investment performance… especially given their new heft and scale, we believe that CIOs will need to consider a new approach, including a potential overhaul of their business footprint,” the report noted.McVey’s report says that macroeconomic and geopolitical change could merit a new approach to asset allocation, including shorter duration and greater exposure to real assets, as well as a more holistic emphasis on portfolio construction, technological prowess and risk management. Here are some findings from the report:

  • More investment infrastructure and scaling headcount is required to maintain performance, particularly at the large plan level, and to cover new asset classes.
  • CIOs will increasingly migrate towards managers who stay in their lanes, rather than, for example, those that have held on to public positions for too long and been stung as a result.
  • CIOs should consider adding more top-down guard rails to ensure that their teams are sizing positions properly, creating the right sector and thematic tilts, and tightening up risk management practices, including factor analyses.
  • CIOs intend to boost illiquid investments to fully 55 percent of total plan assets within three years. Many intend to invest more dollars in private credit, real estate, infrastructure and select PE.
  • The global energy transition, supply chain resiliency and workforce development are top of mind in ESG, which will create significant investment opportunities in PE and real estate.

Investcorp’s haul
Investcorp has raised more than $800 million for its debut GP stakes fund,  our colleagues at Buyouts report (registration required)Strategic Capital Partners exceeded its $750 million target (including co-investment capital) and has completed nine deals thus far, including Centre Lane Partners, private debt manager Marblegate Asset Management and special sits firm Warwick Capital Partners. The vehicle targets minority stakes in mid-market managers, with assets between $1 billion and $10 billion.

“The way we deliver yield is we don’t recycle any number,” Investcorp’s SCG boss Anthony Maniscalco said during a panel at IPEM in Cannes last week. “So, if one of our GPs generates carry, they generate annual fee returns, balance sheet returns, and they distribute it to us. We distribute it to our investors and it creates a very high yield. And that’s one of the things that really drives investors to the strategy, it’s a private equity-like return profile in terms of MOICs and IRRs…That’s where this becomes compelling to investors as they get their money back.”

More room in the ARK
Space may well have been limited in Noah’s Ark, but Cathie Wood’s ARK wants to invite a vast universe of individual investors. The investment firm known for betting on high-risk, “disruptive” technologies has made its debut foray into private investing with the launch of ARK Venture Fund, an interval fund that will make early- and late-stage investments in listed and unlisted companies, according to the WSJ (subscription required).

Retail investors can get a piece of the action for as little as $500. They will have the option to withdraw capital every quarter, with redemptions capped at 5 percent of NAV, the WSJ noted. “We think retail investors should have the right to participate in the value creation of the most exciting and successful technology companies on the planet, even if they’re private,” ARK analyst Maximilian Friedrich was reported as saying.

ARK will have some obvious questions to answer. Private investing is a different beast to public investing. Not that the latter has been going brilliantly for ARK of late – its flagship listed product, ARK Innovation ETF, is down around 60 percent year-to-date. Retail investors may balk at the 2.75 percent management fee, part of an overall fee burden of 4.22 percent in the fund’s first year of operations. The ARK team will not receive any carry for the private part of the portfolio, raising potential questions over alignment. Side Letter will be watching with keen interest.

Essentials

Baird bags Goldman MD
Managing directors don’t leave Goldman Sachs that often, particularly after a short time in the job. Last week, our colleagues at Secondaries Investor reported Goldman’s head of secondary advisory, Alex Mejia, is set to join mid-market investment bank Baird to lead the rollout of the same unit there (registration required). Mejia had been at Goldman for less than a year and a half, having joined from Lazard’s Private Capital Advisory team in 2021. In a statement, partner David Kamo stressed that secondary advisory remains “a key area of focus” for Goldman and that it anticipates “growing [our] capabilities in the space”.

The reasons behind Mejia’s department are unclear. It highlights, however, that mid-sized investment banks are scrabbling for a piece of the secondary advisory action. William Blair, DC Advisory and Raymond James are among other groups to have entered the market over the past 18 months (the latter via the acquisition of Cebile Capital), while Piper Sandler and Solomon Partners are understood to be exploring it.

This looks like a good time to target the mid-market, particularly on the GP-led side of the secondaries market targeted by Goldman and Baird. Risk-off attitudes from secondaries investors are making it difficult to syndicate large, concentrated continuation fund deals, encouraging advisers to bring smaller offering to market.

Lehman’s raise
Lower-to-mid-market-focused JF Lehman & Company is seeking $1.6 billion with a $1.8 billion hard-cap for its sixth flagship vehicle, US pension documents show. JFL Equity Investors VI will make control investments that are either founder-owned or are part of a corporate divestiture, following its predecessors’ strategies, according to materials prepared for the Arkansas Teacher Retirement System’s 26 September board of trustees meeting. The GP’s average performance over its previous three funds is around 27 percent gross internal rate of return, according to the documents. JF Lehman expects to hold a first close this month.


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