Management company musts
Yesterday, Private Equity International published an interview with CPP Investments‘ head of PE Asia, Frank Su, about how the world’s largest PE enthusiast was approaching emerging managers at a time when many LPs are having to prioritise existing GPs (if you haven’t already, read it here). The issue with first-time funds is that they typically require significantly more due diligence than an entity that the LP already knows; in today’s congested environment, few LPs have the time or resources to adequately scrutinise a new firm.
Proper diligence for emerging managers is critical. In a recent special report published in partnership with GEN II Fund Services, our colleagues at Private Funds CFO noted that many debut funds are tempted to wing it when it comes to management company administration. Like so much of the industry, administering management companies used to be simpler, but with the growth of regulatory attention, LP demands, assets under management and strategic complexity, the task isn’t so easy anymore, and the stakes are higher than ever. If a regulatory filing is submitted late or incorrectly, it doesn’t just risk regulatory action, but a reputational hit that investors won’t appreciate – especially for new firms that haven’t built trust with LPs.
The full article is well worth a read, but here are three key takeaways for staying on top of evolving management company needs:
- Attention matters: If not using a service provider, in-house staff must stay current with unexpected tax and regulatory changes, such as when the IRS recently made sweeping reforms to how meals and other entertainment expenses are handled. Knowing about such changes is one thing; fully understanding how they apply is another.
- Staffing up: Some emerging managers might not appreciate how big a staff can be required during even the first few years. If a GP goes it alone, then three to four people may be needed to keep a segregation of duties, such as an accounts payable function separate and apart from an accounting function.
- Tech bites: Though GPs may be tempted to plug labour shortages with software, institutional-grade tech can be too expensive for a single client to afford, leaving them with a consumer option, and internal IT staff will still be required to maintain it. That price tag drops significantly when more sophisticated tech is provided by a service provider that can spread the cost across its entire client base.
Steve Nelson, chief executive of the Institutional Limited Partners Association, stepped down this week, per a Monday statement. Managing director of industry affairs Jennifer Choi has been named acting CEO until the board names a permanent successor. Nelson joined ILPA in 2018 after a 19-year stint at global investment firm Cambridge Associates, where he was most recently chief operating officer. At ILPA, he was responsible for leading a 30-strong team in Washington DC and Toronto, as well as managing a 16-member board of directors and four-person executive committee, according to LinkedIn. Choi had only recently been named as successor to Chris Hayes, former senior policy counsel, upon his departure for a crypto platform back in February.
Nelson’s next move is unclear. In an interview with PEI in 2018, he said compensation wasn’t foremost on his mind. “The opportunity that ILPA represented – the chance to build something here and really scale what is already an impressive organisation – that was the primary motivation, and really everything else was secondary.”
His successor will join at a pivotal moment for institutional investors and the PE industry more broadly. The US Securities and Exchange Commission has made clear its aspirations to overhaul the GP-LP relationship by outright banning certain practices – a move away from its traditional focus on making sure GPs are providing LPs with appropriate disclosure. ILPA, for its part, is in favour of the changes. “These proposed rules would importantly help address the increased prevalence of conflicts of interest in the industry, ensure that investors can validate that the fees and expenses that they are charged match what was contractually agreed and deter practices that feed misalignment such as ‘shifting’ liability risks from private fund advisers to investors,” Nelson said in February.
FountainVest’s fund close
China’s fundraising environment may be more challenging than ever, but select funds still appear to be getting raised. Case in point: Hong Kong-headquartered FountainVest closed its fourth flagship fund on $2.9 billion this week, per Asian Venture Capital Journal. The fund had been launched in October 2020 with a $2.8 billion target, PEI data shows. LPs included California State Teachers’ Retirement System, CPP Investments and State of Wisconsin Investment Board.
China fundraisers will take heart from FountainVest’s success. Western appetites for Chinese PE have waned in some quarters following a regulatory crackdown on popular sectors, including online education and consumer technology, last summer. China-headquartered PE firms collected just $4.3 billion in the first quarter of 2022, less than half the $8.8 billion gathered in the same period last year and $9.1 billion in Q1 2020, according to PEI data.
“Ninety percent of LPs we’re talking to at the moment are saying they’ve put China on pause,” Niklas Amundsson, a Hong Kong-based partner at placement firm Monument Group, told PEI in December. “It is really a challenge – some funds in market are not even seeing re-ups. If you had set out fundraising before all of this happened, you’d have probably been quite ambitious. These fundraisings will need to close at some point and could do so below target.”
Tackling VCs’ ‘implicit bias’
As the world celebrates Pride Month, a new US venture capital firm aims to address the drastic underrepresentation of LGBTQ+ founders in start-up funding rounds, our colleagues at New Private Markets report (registration required). Colorful Capital, founded by Megan Kashner, professor of sustainability and social impact at Northwestern University’s Kellogg School of Management, and William Burckart, chief executive of The Investment Integration Project, will make seed and pre-seed investments of up $1 million in companies founded by individuals identifying as LGBTQ+.
Founders in the US have received $1.8 trillion in VC funding, of which just $13 billion (0.7 percent) has gone to LGBTQ+ founders, StartOut’s Pride Economic Impact Index shows. This is despite LGBT individuals comprising 5.6 percent of the US population, according to 2021 data by Gallup. Burckart says many VC investors have an implicit bias against members of the LGBTQ+ community, who often have different family lives and present differently to non-LGBTQ people. “The entire venture capital industry is led by White cisgender males,” he notes. “Because of that… LGBTQ+ founders are routinely overlooked and undervalued.”
Name: Teacher Retirement System of TexasHQ: Austin, US AUM: $201 billion Allocation to alternatives: 34.6%
Teacher Retirement System of Texas confirmed up to $430 million in private equity commitments in May 2022, a source from the public pension told PEI.
Of this total, $300 million was committed to vehicles managed by TPG, an alternative manager that holds more than $120 billion in assets. TRS Texas committed $240 million to TPG Partners IX, which launched in January 2022 targeting $18.5 billion in investor commitments. The remaining $60 million was committed to TPG Healthcare Partners II, a growth equity vehicle launched alongside TPG IX with a focus on healthcare investments.
Leonard Green & Partners, a private equity firm founded in 1989, received commitments of $50 million each towards two of its funds: Green Equity Investors IX, which launched in February 2022 seeking $13.5 billion in investor capital; and Jade Equity Investors II launched in 2022 off the back of its predecessor’s $2.75 billion final close.
Meritech Capital Partners VIII also received a $30 million commitment. Incorporated in 1999, Meritech Capital Partners is a California-based investment firm that targets information and medical technology companies in North America.
TRS Texas allocates 17.3 percent of its investment portfolio to private equity, which corresponds to capital worth $34.77 billion. The pension has a target allocation of 16 percent to private equity.
As illustrated below, TRS Texas’s recent private equity commitments have tended to focus on buyout vehicles that invest across North America.
For more information on TRS Texas, as well as more than 5,900 other institutions, check out the PEI database.
Today’s letter was prepared by Alex Lynn and Rob Kotecki.