Side Letter: MassPRIM’s markdowns; Europe’s resilience; Asia’s ESG progress

MassPRIM posted a loss for its private equity portfolio in the third quarter. Plus: PE-backed companies in Europe and the UK defy the slowdown; and a surprisingly low number of APAC GPs are thinking about climate change when dealmaking. Here’s today's brief, for our valued subscribers only.

Just happened

MassPRIM’s markdowns
PE valuations continue to play catch-up with their public counterparts. Massachusetts Pension Reserves Investment Management Board is the latest to see this play out. The $92.4 billion pension marked its PE portfolio down by 5.7 percent gross of fees in the third quarter, our colleagues at Buyouts report (registration required). Documents prepared for a 15 November investment committee meeting showed that 2012-vintages were marked down by 19 percent during the quarter, leaving them with a net asset value of $458 million; 2015-vintages were down 7.5 percent to a $1.9 billion NAV; and 2016-vintages fell by 9.6 percent to an $834 million NAV.

PE markdowns have been slow to reflect turmoil in the public markets this year. The dynamic has left many US institutions overexposed to the asset class through a dynamic known as the denominator effect, which in turn has forced some to become more selective or reserved when re-upping and committing to new managers, exacerbating this year’s challenging fundraising environment. Markdowns, oddly enough, may go some way towards easing these pressures.

Data just in…
European and UK private equity-backed companies are showing resilience amid economic slowdown in the region, according to investment bank Lincoln International’s European Private Markets Perspective: Q3 2022 report out this morning. PE-backed companies in the study reported year-on-year revenue and EBITDA growth of 83.3 percent and 61.8 percent respectively as of end-September. That compares with 78.6 percent and 68 percent in Q3 2021.

The report notes that covenant breaches under credit agreements are likely to persist next year. Such breaches – which are still low by recent historical standards – happened in around 3.7 percent of the companies Lincoln reviewed in the third quarter, up from an all-time low of 2.2 percent registered in the final quarter of last year.

Richard Olson, managing director of Lincoln’s UK/European valuations and opinions group, tells Side Letter: “The overwhelming majority that we see are leverage covenant breaches, with most companies only having a single covenant. We have seen lenders and sponsors continuing to engage proactively to cure these types of situations without having to rise to the level of a dispute.”

Here are other findings from the report:

  • Enterprise value multiples remained stable at 11.9x in Q3, in line with figures from the second half of 2020 until the most recent quarter. Leverage multiples of EBITDA stood at 5.1x, nearly similar to prior quarters.
  • By industry, business services and TMT recorded the highest EV multiple, at 13.3x and 12.8x respectively.
  • Gross profit margins of companies in the study improved 1.5 percent quarter-on-quarter (22.1 percent in Q3 2022 versus 20.6 percent in Q2), suggesting that PE-backed companies have been able to pass along cost increases to consumers.
  • Data for the report came from 200 PE-backed mid-market UK and European companies and more than 300 PE and private credit securities for the period.

They did the math

A sobering data point. Despite the region being at the forefront of the climate crisis, less than two-thirds of Asia-Pacific GPs are considering climate change in their ESG due diligence. That’s according to the Asia Funds ESG Survey 2022 from law firm Morrison Foerster, which collated data from 100 regional fund managers with more than $1 billion in assets under management. The result is surprising, given that assets in the region seem particularly susceptible either to destruction of equity value or disruption to business operations and supply chains as a result of extreme weather events such as bushfires or flooding.

“It may be that these investors are focused on deals in fast-growth sectors such as technology or financial services, where businesses are perceived as having smaller carbon footprints,” the report noted. “Still, the lack of focus on
climate issues nonetheless seems short-sighted, particularly as companies come under more pressure to look beyond the carbon emissions for which they are directly responsible.”

Here are some other key findings:

  • Only 14 percent of the firms surveyed tie investment team compensation to ESG performance, and 12 percent tie executive compensation to ESG performance.
  • More than half (56 percent) plan to tie ESG performance to investment team compensation in future.
  • While 62 percent of firms have an ESG committee, only 22 percent of firms employ a dedicated ESG professional.
  • Less than half (46 percent) of respondents conduct due diligence on every deal, with another 46 percent doing so on most.


More climate cash
Another day, another climate close. This time it’s the turn of Energy Impact Partners, which has closed its early-stage climate fund – Deep Decarbonization Frontier Fund 1 – on $485 million, our colleagues at New Private Markets report (registration required). Launched at the start of the year with a $350 million target, the vehicle seeks to finance early-stage climate tech companies developing solutions to overhaul high-polluting industries. Its LP base mostly comprises large utility, energy and industrial companies, including Microsoft Climate Innovation Fund, Williams Cos, Duke Energy, AvalonBay Communities, Burns & McDonnell and Southern Co and TC Energy Corp. These corporations also offer advice on potential deals.

Today’s letter was prepared by Alex Lynn and Carmela Mendoza