Side Letter: Partners Group highlights; PE’s marketing migraine; Arizona’s co-investment splurge

Democratisation could drive $10 trillion of private equity inflows, according to Partners Group. Plus: GPs must be careful not to fall afoul of the SEC's new marketing rule in this challenging fundraising environment; and Arizona is turning on the co-investment tap. Here’s today's brief, for our valued subscribers only.

Just happened

Changing the game
Democratisation will somewhat alter the DNA of the private markets: that was a key takeaway from Steffen Meister, executive chairman of Partners Group, on the firm’s annual results call this morning. Inflows will be driven by the roughly $80 trillion wealth management market, $30 trillion defined contribution market and $40 trillion retail landscape.

“All of them [individual investors] are very early innings in their investment activities, very small allocations, but actually most of them [are] growing very massively… If you think about a 6-7 percent allocation, that’s $10 trillion and as sizeable as the entire private markets industry today,” Meister said.

Here are some other highlights from the call:

Silicon Valley Bank: Since Partners Group tends to avoid early-stage, cashflow-negative venture capital assets, the firm’s direct investment exposure to SVB is “negligible”, chief executive Dave Layton noted.

Fundraising: Partners Group has raised more than $10 billion against a $15 billion target for its latest direct equity flagship programme, Layton added. “It’s slower than normal, no question, but it’s moving.” It expects between $17 billion and $22 billion of client commitments in 2023, with a tilt in the second half of the year.

Investments: Partners Group’s deployment pipeline is down and transaction activity will be lower in the first couple of months of the year, largely driven by the lack of availability in financing.

Total assets: AUM grew to $135 billion as of 31 December 2022, from $127 billion as of end-2021.

PE’s marketing migraine
The US Securities and Exchange Commission’s new marketing rules have combined with a challenging fundraising market to creature a potentially hazardous environment for investment advisers and GPs, our colleagues at Regulatory Compliance Watch report (registration required). The SEC’s heightened focus on areas including valuation, accuracy of regulatory filings, fee reporting, secondaries transactions and continuation funds are putting marketing and compliance teams in a tough spot, industry practitioners warn.

“The performance reporting requirements in the marketing rule are a big deal,” Adam Aderton, a partner with Willkie Farr & Gallagher, tells RCW. “There is the obvious business desire to report higher performance to support fundraising and other objectives. At the same time, marketing rule performance reporting is a top exam priority. Private fund advisers will need to be deliberate and thoughtful about their performance reporting process and disclosures to avoid inadvertently running afoul of the marketing rule.”

Smaller firms without adequate legal and compliance resources – and which might already be struggling on the fundraising trail – may find themselves at greater risk of these advertising violations. RCW, for its part, lists some handy tips for compliance officers to stay on the right side of the marketing rule and potential valuation/fee problems. These include considering extra disclosures and checking your own valuation processes and models before the SEC does. Find the rest of their recommendations here.

Joining the co-investment crowd
Arizona State Retirement System is potentially committing up to 30 percent of its $1.35 billion PE allocation towards co-investments in 2023, our colleagues at Buyouts report (registration required). Last year, the $48.2 billion system committed $1.36 billion to 17 funds, including one co-investment.

Speaking at a 16 March investment committee meeting, deputy chief investment officer Samer Ghaddar said the pension is now engaging in due diligence for a separately managed account for co-investments. He added that the system will cut the number of manager relationships from 90 to between 40 and 45, and only the top-performing ones will stay. The pension finds itself in a good position to embark on a co-investment-heavy approach as its PE portfolio has been cashflow-positive for six of the past seven years.

Co-investments are increasingly popular among many institutional investors due to their potential to reduce fee expenditure. The nation’s largest public pension fund, California Public Employees’ Retirement System, made plans to revamp its PE programme last year, including a proposed policy to increase the CIO’s co-investment cap to $1.5 billion. CalPERS’ co-investments and custom accounts accounted for 64 percent of last year’s commitments by value, Side Letter noted earlier this month.


Brentwood’s back
Los Angeles-based Brentwood Associates is targeting $1.25 billion for its seventh PE fund, according to an SEC filing. The target represents a modest increase on the vehicle’s predecessor, Brentwood Associates Private Equity VI, which closed on $1.15 billion in 2017 against a $750 million target, according to PEI data. Brentwood focuses on growth equity, founder recapitalisations and buyouts across the consumer and business services sectors. Brentwood did not respond to a request for comment.

In 2021, Spring Bridge Partners, a secondaries unit that has since become part of Ares Management, led a fund restructuring of select assets from Fund VI, as well as the $440 million 2006-vintage Brentwood Associates Private Equity IV, affiliate title Secondaries Investor previously reported (registration required). The process was intended to provide liquidity to existing limited partners and allow management to realise future growth.

Today’s letter was prepared by Alex Lynn with Carmela Mendoza, Madeleine Farman and Katrina Lau.