Side Letter: PE’s $73bn democratising duo; Santa Barbara’s allocation outlook

There's a newly combined firm on the block offering retail investors and private wealth clients access to private markets. Plus: Santa Barbara has a plan to get its private equity allocation in check; and you have the chance to tell us which women have the biggest influence in private markets. Here’s today's brief, for our valued subscribers only.

Just happened

Forman and Lindberg: democratising private equity (Source: FS/Portfolio Advisors)

Private markets’ $73bn newlyweds
Giving retail better access to private markets – and providing private markets fund sponsors with access to the largely untapped retail capital market – has been the hot topic on everyone’s lips over the past year, as we chronicled in our Democratisation Report this month.

The latest example of a firm trying to capitalise on this opportunity is Portfolio Advisors, the Connecticut-headquartered private markets firm best known for its consultancy business, fund of funds products and secondaries funds (it’s also active across private credit and real estate). This month, the firm combined with FS Investments, a Philadelphia-headquartered manager that traditionally offers listed products such as mutual funds and BDCs to retail investors, to create a firm with $73 billion in AUM.

Speaking to Side Letter this week, top executives from the two firms said the marrying of retail capital with private markets was something FS clients had been demanding for years.

“Over the last decade, one of the most frequently asked questions from advisers, who are our clients, was: ‘When are you guys going to bring a private equity product to the marketplace?'” said Michael Forman (above-left), FS’s chairman and chief executive. To him, private credit, secondaries, wealth management capital and permanent capital are the hottest growth areas today – something the tie-up with Portfolio Advisors can service well.

Both firms expect to benefit from offering PortAdv’s private markets products to FS’s retail clients, such as via the former’s ’40-Act MVP Private Markets Fund and by raising more capital via feeder funds at banks such as UBS, BofA Securities and Morgan Stanley. PortAdv won’t launch exclusive products for the retail market and will instead push ahead with funds like its MVP vehicle, according to managing director Brooks Lindberg (above-right).

Private markets firms are clamouring to figure out how they can better tap individual investor capital, with Coller Capital yesterday saying it had launched a private wealth unit to better raise money from high-net-worth individuals. PortAdv/FS’s tie-up appears to have addressed this issue in one fell swoop.

KKR’s new PE heads
Just as Side Letter was going to press, news came in that Pete Stavros and Nate Taylor, KKR’s co-heads of private equity in the Americas, have been named global co-heads of the firm’s PE business. In the newly created roles, the pair will work with KKR’s regional PE teams to “support alignment on global investment themes, share best practices and operational playbooks and facilitate greater mobility of talent”, per a statement. Stavros has been instrumental in the firm’s employee ownership programme, as we explored here.

Women of Influence
Nominations are now open for PEI Group’s third annual Women of Influence ranking. The list celebrates 60 women across multiple asset classes, including PE, private debt, infrastructure, PE real estate and VC. Previous inductees in the PE category have included Suyi Kim, global head of PE at CPP Investments; Alisa Wood, a partner at KKR; and Lenna Koszarny, founding partner and CEO at Horizon Capital.

In an industry that is still largely male-dominated, the ranking shines a light on the achievements of female leaders within the asset class. Every year, PEI Group is flooded with nominations for worthy candidates, who are selected based on three main factors: the nominee’s achievements over the past 12 months; evidence of innovation or game-changing ideas; and evidence of leadership, influence or impact. There are no age or geographical restrictions; nominees should not have appeared in PEI Group’s 2021 or 2022 Women of Influence in Private Markets lists.

Click here to nominate. The deadline for submissions is Wednesday 22 March 2023.

Tuesday’s Side Letter noted that Primavera Capital was seeking $2 billion for its Changzhou Primavera Zhike Equity Investment Partnership. The correct figure is understood to be $100 million. We apologise for the error.


Ditching the denominator
Like so many of its peers, Santa Barbara County Employees’ Retirement System is looking at ways to get its PE allocation back on track. In documents for the pension’s board meeting yesterday, its consultant Hamilton Lane outlined three scenarios that would bring its PE allocation back on track by 2027. SBCERS had a 14.2 percent actual allocation to the asset class as of 30 September, north of its 10 percent long-term target.

Each scenario outlined three different levels of commitment pacing. The first, with $65 million in annual commitments, would bring the PE target allocation down to 13.5 percent this year and to 8.7 percent by 2027. Scenario two, with $75 million in annual commitments, would see its 2027 allocation hit 9.1 percent; scenario three, with $85 million in annual commitments, would see it drop to 9.5 percent.

Managing its PE portfolio exposure is one of SBCERS’ key portfolio objectives for the year. Other goals include focusing its commitments on core existing managers; potentially adding commitments to smaller buyouts, venture and growth; and diversifying its geographic allocation to include more Europe.

SBCERS won’t be alone in pondering ways to undo PE’s recent denominator effect. What is notable, however, is that its $65 million to $85 million proposed budget range is broadly in line with what the pension has deployed each year since 2019. This may well suggest that, rather than taking bold steps such as cutting managers or selling fund stakes, some investors might simply keep their deployment controlled and steady, with a view to rightsizing their allocations more organically over a longer period.

Climate capital
Tikehau Capital is fast becoming one of the most active fundraisers in the climate space. The European firm is launching a PE decarbonisation fund, our colleagues at New Private Markets report (registration required). TDF II is the successor to Tikehau’s €1.1 billion T2 Energy Transition Fund. It will invest in Europe and North America; by contrast, Tikehau had created a separate North America-focused vehicle alongside the Europe-focused T2 ETF.

The firm’s deployment rate is just as fast: it has invested more than €3 billion in climate-related assets since the firm set a target of reaching €5 billion in managed assets dedicated to climate by 2025. T2 ETF is nearly fully invested and has exited three portfolio companies. This latest news comes two weeks after Tikehau disclosed the launch of a private debt climate fund seeking individual investor capital.

Dig deeper

Institution: San Francisco Employees’ Retirement System
Headquarters: San Francisco, US
AUM: $32.63 billion
Allocation to private equity: 30%

San Francisco Employees’ Retirement System recently closed two private markets fund commitments on a combined $115 million, according to materials from its 16 February retirement board meeting.

From SFER’s Private Credit portfolio, $65 million has been invested into Blue Torch Credit Opportunities Fund III, alongside a further $50 million to Institutional Venture Partners XVIII, which is classified as a venture capital investment within SFERS’ private equity portfolio.

San Francisco Employees’ Retirement System has a 30 percent exposure to private equity and is above its target allocation of 23 percent. As illustrated below, SFERS’ recent private equity commitments have tended to focus on either buyout or credit vehicles that invest across North America in the TMT and financial services sectors.

For more information on San Francisco Employees’ Retirement System, as well as more than 5,900 other institutions, check out the PEI database.

Today’s letter was prepared by Alex Lynn with Adam LeCarmela Mendoza, and Helen de Beer