Side Letter: LPs’ crypto writedowns; EY’s alts survey; Palico’s PE pricing

Private equity's FTX blow could raise questions over whether due diligence processes are always robust enough. Plus: Results from EY's latest alternatives survey; and LPs stomach greater discounts to offload fund stakes. Here’s today's brief, for our valued subscribers only.

Just happened

PE’s crypto questions
Private equity investors haven’t escaped unscathed from the scandal-hit crypto exchange FTX. Here’s a quick round-up from some of those who’ve disclosed exposures to the business in recent weeks:

  • Temasek invested $210 million for a roughly 1 percent stake in FTX International last year, and $65 million for about 1.5 percent in FTX US in January. It has decided to write down its full investment in FTX, irrespective of the outcome of FTX’s bankruptcy protection filing, per a statement.
  • Missouri State Employees’ Retirement System chief investment officer TJ Carlson said in a meeting last week that it had an $800,000 to $1 million exposure to FTX through an undisclosed co-investment fund, which itself had a 3 percent exposure to the crypto exchange. More from our colleagues at Buyouts here (registration required).
  • Ontario Teachers’ invested twice via its Teachers’ Venture Growth platform, first through a $75 million cheque for FTX International and its US entity in October last year, and a $20 million follow-on in the latter in January, per a statement. It will write these investments down to zero at the end of its financial year.

Make no mistake, PE’s exposure to the crypto sector is comparatively limited. Some, like Temasek, have stressed that FTX isn’t even a crypto investment in the traditional sense given that it’s an exchange rather than digital assets themselves. “There have been misperceptions that our investment in FTX is an investment into cryptocurrencies,” Temasek’s statement read. “To clarify, we currently have no direct exposure in cryptocurrencies.”

Whether crypto or crypto-adjacent, what is clear is that PE will become even warier of this largely unregulated space. Beyond that, and perhaps more importantly, FTX is likely to prompt much navel gazing when it comes to due diligence, and how, if the allegations are true, potential warning signs were missed by so many sophisticated GPs and LPs.

Alternative attitudes
EY has published the results of its latest Global Alternative Fund Survey, which fielded responses from 226 global PE and hedge fund managers and 61 investors from May to August 2022. We’ve compiled some of the key findings for you:

  • On average, investors have 26 percent allocated to private equity and venture capital this year, the same proportion as in 2019.
  • Some 28 percent plan to raise their PE allocations in the next three years, a smaller percentage than for real estate (29 percent) and illiquid credit (51 percent).
  • Though only 14 percent of investors are required by their organisations to invest in socially responsible products, 29 percent expect to be required to do so in the next two to three years.
  • More than one quarter (26 percent) of investors decided this year to not invest with a manager because of inadequate ESG policies, a 5 percentage point gain from 2021.
  • Governance and climate risk are by far the most important ESG considerations when making investment decisions.
  • Some 59 percent of PE managers want staff in the office three to four days a week, while only 27 percent expect staff back five days a week.
  • Talent retention is top of mind for GPs this year, while geographical expansion is the lowest priority when it comes to staffing plans.

Secondaries pricing update
Veritas Capital‘s 2017-vintage flagship vehicle was the most in-demand fund by price paid on the secondaries market, according to data released by Palico. A stake or stakes in the New York-headquartered firm’s $3.55 billion Fund VI attracted a 12 percent premium to its net asset value – the highest out of a list of 69 fund trades intermediated by the private equity marketplace in the last six months. ICG‘s Strategic Equity Fund III – itself a secondaries fund – came in second, attracting a 10 percent premium.

Black Diamond Capital Management‘s 2006-vintage BDCM Opportunity Fund II traded at the lowest price with a 28 percent discount to NAV.

According to Palico, sellers on average accepted bigger discounts when selling fund stakes in the third quarter due to a liquidity crunch. More than half of deals Palico intermediated were discounted to NAV, reversing a trend in Q2 when most funds traded at a premium.

Our take: LPs focusing on paper discounts are having to stomach a greater haircut, based on Palico’s intermediated trades. Those who’re more focused on dollar value will look past the optics of a discount or premium to NAV.


Pritzker’s personnel change
Paul Carbone, co-founder and managing partner of direct investing family office Pritzker Private Capital, will step down from his role and day-to-day management of the firm, effective 1 January, per a statement. Carbone will continue to serve as president and chair of the firm’s management and investment committees; Michael Nelson, a partner and head of investing at the firm, and David Gau, a partner and head of operations, will be promoted to managing partner and chief operating officer respectively. Nelson and Gau will report to PPC chairman and chief executive Tony Pritzker.

PPC invests in mid-market companies in North America focused on manufacturing and services. It held a $2.7 billion final close on its third vehicle last year, making it one of the largest family investment vehicles raised in North America. You can read our interview with Nelson and Gau here.

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

22 November

23 November

24 November 

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