Why this year could be 2020, too
As late as the beginning of February, the LP portfolio secondaries market was red hot. Not a week went by without news emerging of an investor offloading stakes in order to free up capital for reinvestment or exploiting a period of stable valuations to reassess their portfolios, part of which we explored in our latest Deep Dive. Now with rising inflation, impending interest rate rises and the Ukraine crisis hitting stock prices, enthusiasm for LP portfolios seems to be dissipating. Side Letter is aware of several deals which, if they transact at all, are likely to be much smaller than originally intended.
“You can still do a GP-led [secondary deal] on a pharmacy chain or healthcare asset but diversified LP-led deals are close to impossible,” says one buyer of fund stakes, adding that even if a buyer is willing to transact, there are few LPs willing to sell at a steep optical discount to the most recent marks.
“The LP-led market is a fundamentally good market and we have no plans to leave it,” notes another Europe-based intermediary. “But at the moment, it is not clear that it is worth our while.”
The last time this dynamic was in play was in the second half of 2020, when volatile public markets caused buyers to double down on more concentrated deals. If public markets remain depressed for long, with lower valuations feeding through to the private markets, it could be a while before LPs feel ready to sell again unless they have a real need for liquidity.
IFM goes long
Australia’s IFM Investors has raised A$450 million ($336 million; €306 million) towards a A$1 billion target for its debut long-hold fund, per the Australian Financial Review. Long Term Private Capital would have a 15-year term, rather than the standard 10 years, in order to eke out as much growth as possible from its investments. The fund is expected to write cheques of about A$300 million in Australia and New Zealand, and could gather up to A$750 million in co-investments over the course of its life. IFM is understood to have included a five-year liquidity mechanism for investors that require an early exit.
Longer hold funds have amassed substantial capital in recent years as firms increasingly prefer to hold onto prized assets rather than sell them either back to themselves, thus incurring fees and expenses, or to other firms. Brookfield and EQT are among the latest entrants to this space, which has become “an asset class” in its own right, Blackstone‘s PE boss Joe Baratta told affiliate title Buyouts in 2020 (registration required).
Environmental, social… gambling
GPs and LPs alike are always keen to talk up the rising importance and robustness of their ESG policies. This seems to fit awkwardly, however, with another growing trend: PE investment in the gambling industry. PE dealflow in the global casino, gambling and betting sector reached $6.3 billion last year, up from $1.2 billion the year before, Private Equity News reports (subscription required), citing data from PitchBook. That total includes the acquisition of two casino operators by Apollo Global Management, in Toronto and Las Vegas, for a combined $4.85 billion.
This year is likely to be even bigger due to Blackstone’s long, successful pursuit of Australian casino operator Crown Resorts, which it is set to acquire for around $6.3 billion. The liberalisation of online gambling laws in the US will only add fuel to the fire.
The income streams offered by these assets are clearly attractive, as is being able to buy covid-impacted casino businesses at a discount. Still, the growth of such investments may raise difficult questions about why certain potentially addictive industries, such as gambling, remain popular targets for investment, while others, such as tobacco, are often not. Some LPs have already voiced clear opposition to the sector: Korea’s $35 billion Hyundai Marine & Fire Insurance, for example, excludes gambling investments despite not even having a formalised ESG policy in place.
An Iconiq fund
Iconiq Capital, a one-time family office catering to the likes of Facebook founder Mark Zuckerberg and Twitter’s Jack Dorsey before turning GP, is targeting $5.75 billion for its seventh tech growth fund, according to details from New Mexico State Investment Council’s investment committee meeting yesterday. The fund will target between 20 to 25 companies focused on enterprise software, fintech and consumer technology. Fund VII is targeting about 53 percent more than its 2021-vintage predecessor, according to PEI data. The status of that vehicle is unclear. More details on Buyouts.