Side Letter: NYC’s divestment drive; ex-Mercury exec joins DC; Bain’s healthcare report

Welcome back! We trust you enjoyed a restful break. In today's brief, two New York pensions have taken significant action in decarbonising their portfolios. Plus: Bain & Co's annual check-up for private equity healthcare investing. For our valued subscribers only.

Just happened

NYC: aiming for net zero (Source: Getty)

Net zero in NYC
Two US public pensions just took a major step as part of private equity’s move towards decarbonisation. New York City Comptroller Brad Lander unveiled plans last Wednesday to divest the New York City Employees’ Retirement System and the Teachers Retirement System from any upstream fossil fuel investments, per a statement. The pensions will ask private markets managers to exclude such assets and, if “thorough engagement proves to be futile” with managers or companies whose core business undermines climate goals, the systems will consider excluding them.

“Adopted by trustees today, the Net Zero Implementation Plans are a tangible, measurable roadmap toward decarbonisation across our investment portfolio and the global economy,” said Lander in the statement. “NYCERS’ and TRS’ plans will prudently address climate risks and maximise opportunities to benefit New York City pensioners and beneficiaries, consistent with our fiduciary duty. This ‘high ambition’ plan is also a call for partnership with other pension funds, asset managers, financial firms and portfolio companies. The climate crisis cannot be effectively addressed in silos.”

The move comes as part of a 2021 plan for NYC’s public pensions to reach net-zero emissions in their investment portfolios by 2040 and to invest $50 billion in climate solutions across all five NYC pension funds by 2035. From 2017 through 2022, NYCRS and TRS have been actively divesting fossil fuel reserve owners in their public equities portfolio and doubled climate investments.

This decision is a significant one for an asset class that remains somewhat divided over how best to tackle the climate crisis. Many in private markets are committed to reducing their exposure to fossil fuel-related investments or targeting net-zero carbon emissions. However, speaking in 2020, Chris Ailman, CIO at the California State Teachers’ Retirement System, noted that divesting from fossil fuels is unlikely to bring about the social changes activists are campaigning for. What’s more, divestment is no easy feat. Maine Public Employees Retirement System, for example, is among those exploring ways to cut its fossil fuel exposure; as Side Letter noted in January, however, doing so could be a complicated, and costly, process.

Though it’s not entirely clear whether NYC’s move would involve active divestment on the secondaries market or simply screening any future investments in this space, its emphasis on engaging with existing managers and potentially excluding those who don’t respond to these efforts seems to sit somewhere between both schools of thought.

Ex-Mercury (exec) rises
Investment banks around the world have been rushing to build up their secondaries advisory capabilities as GPs run continuation processes on their assets – a move that some have termed the ‘fourth exit route’ after IPOs, secondary buyouts and trade sales. DC Advisory, the advisory unit of Japanese financial services conglomerate Daiwa Securities Group, has been adding professionals over the past eight months and has just hired Mercury Capital Advisors’ former head of secondaries, Sabina Sammartino. Our colleagues at Secondaries Investor have the details (registration required).

Sammartino will work with former Elm Capital and Jasmin Capital secondaries intermediaries in its GP Secondaries team, suggesting the unit will be focusing on sponsor-initiated processes. William Blair and Baird have added personnel over the last six months, while Campbell Lutyens launched a tie-up with JPMorgan for strategic collaboration on continuation funds last month.

They did the math

Annual check-up
PE dealmaking in healthcare remained in reasonable shape last year despite macroeconomic and geopolitical uncertainty. According to Bain & Co’s Global Healthcare Private Equity and M&A Report 2023, disclosed deal value for the sector dropped to $90 billion last year, 40 percent down from $151 billion in 2021. Though a significant fall, it is important to note that 2022 remains the second-biggest year on record for healthcare PE. The number of deals fell about 30 percent from 2021’s all-time high of 515 deals to around 350 deals. Total exit volume for 2022 was 233, down slightly from 244 in 2021; exit value dropped from $179.3 billion to $78.4 billion.

In North America, the number of deals fell from 216 to 167 and disclosed value more than halved from a record $107.5 billion to $45.7 billion. In Europe, the Russia-Ukraine war, rising inflation and a tight labour market resulted in only $3.2 billion of deal value in H2 2022, against an annual total of $25.3 billion. By way of contrast, Asia had one of its best years in terms of both deal count and value, with six deals that had disclosed values of more than $1 billion – five of which took place in the second half. India did particularly well, housing four out of Asia’s 10 largest deals; China deal value, however, plummeted.

Here are some other notable takeaways from the report:

  • Sponsor-to-sponsor exit volume hit a record of 93 in 2022, up 22 percent from the previous year.
  • Biopharma, life sciences tools and med-tech are less influenced by inflation and recession, making them increasingly popular investments for PE.
  • Healthcare carve-outs and public-to-privates may increase as companies seek to prioritise core businesses, and public entities struggle to realise valuations from their lofty 2021 IPOs.

Dig deeper

LP meetings. Here are some LP meetings to watch out for this week.

11 April

12 April

13 April

14 April

Today’s letter was prepared by Alex Lynn with Katrina Lau.