Side Letter: Meketa on returns, strip sales, a new fund of firms

"As long as my PE programme keeps beating public markets by 300 basis points, then it's worth it," said every investor. What if it doesn't? Here’s today's brief, for our valued subscribers only.

Just happened

Is 150bps enough outperformance?

Allan Emkin (pictured) has advised CalPERS and other US institutional investors on their investments for nearly three decades. While he is an unequivocal supporter of private equity, Emkin notes that private equity return assumptions have dropped 60 percent in the last 30 years. Investors expected private equity returns to be 500 basis points above public markets 30 years ago; this dropped to 300bps and now the expectation is coming down to 150-200bps. “That’s a function of having very smart players and lots of capital chasing transactions,” Emkin told us.

He also sees a world in which co-investment – currently seen as an easy way for LPs to squash fees – will be less of a fee break: “Big GPs are extremely talented and creative to figure out a methodology to make more money and generate more business; they will accomplish that objective in co-investments.”

Strip stakes – not so rare

Campbell Lutyens’ 2019 secondary market overview, based on input from more than 60 secondaries buyers, has produced some eye-opening findings. To the surprise of a number of advisors to whom Secondaries Investor spoke, strip sales – GPs selling a portion of a number of assets in one deal – emerged as the most common type of GP-led deal in 2018, accounting for 34 percent of all GP-leds by value. The survey also reported a shift from a seller’s to a buyer’s market – 57 percent of buyers believe the secondaries market is inexpensive, compared with just 4 percent in last year’s report. “All the buyers we’ve spoken to seem to be inundated with opportunities,” says Gerald Cooper, a US-based partner. “This gives them the latitude to be a little more selective in terms of which deals they go for.”

APAC on tour

Chinese corporations are planning to significantly ramp up their cross-border investments, according to a survey by law firm Baker McKenzie. Almost two-thirds of mainland Chinese businesses plan to increase international investments by more than 10 percent over the next two years, with a further 19 percent eyeing a 1-10 percent rise. Chinese businesses identified South-East Asia as their top area of focus, followed by South Asia and Europe. China’s bullishness comes despite reduced cross-border dealflow in recent years due to greater scrutiny by US, Australian and European governments into China-backed deals.


You want a piece of me? A former Blackstone managing director and former Carlyle executive have launched a new firm, Stonyrock Partners, and teamed up with Jefferies Financial Group to launch a fund of firms vehicle. Craig Schortzmann, previously of Blackstone Strategic Capital Holdings, and Sean Gallary, formerly of The Carlyle Group’s AlpInvest, are both veterans in the business of making minority-stake investments in private markets firms. AlpInvest ended up not raising a dedicated fund for the strategy in the end, but Gallary and Schortzmann clearly have faith that owning a piece of the action is still something investors are clamouring for.

Kaza? Nah. Malaysia’s $33 billion sovereign wealth fund, Khazanah, has closed its London office to focus on Asia-Pacific investments, according to The Sunday Times (paywall). The fund was understood to have 10 staff in London before closing its doors last month. The move is likely part of a major overhaul intended to return the fund to profitability following a pre-tax loss last year, according to its 2018 annual results. Khazanah appointed a new managing director in August after the entire board of directors resigned. The country is still reeling from the 1MDB scandal, which allegedly saw government funds used for personal gain.

Dig deeper

Want more data? There are more than 6,700 institutions in our database, including MeketaJefferies and AlpInvest from today’s Side Letter.

He said it

“It is hard to see any economic reason why GPs are willing to do co-investments; undoubtedly, a GP will choose full fee and carried interest as compared to very little returns, if any, on co-investments.”

Allan Emkin, managing principal at Meketa Investment Group, does not see fee-free co-investment as part of a GPs’ long term plans.

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Today’s letter was prepared by Toby MitchenallAlex LynnCarmela MendozaPreeti Singh and Andrew Hedlund.

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