Side Letter: PE’s crowning achievements; Connecticut’s 2-and-20 gripe; BGH’s new billions

PEI's 20th annual awards celebrate an industry in rude health despite significant headwinds. Plus: Connecticut's State Treasurer, which oversees $44 billion of pension funds, has a bone to pick with the 2-and-20 model. Here's today's brief, for our valued subscribers only.

They said it

“Putting the retirement Chevy in reverse… Democratisation via education is not easy but investors need to have access to where capital formation is happening, and this is now less true in the public markets”

In a LinkedIn post, William Kelly, chief executive of the Chartered Alternative Investment Analyst Association, criticises the US Securities and Exchange Commission’s plan to consider raising the threshold for accredited investors

Just happened

Bright lights in dark times
At a time when geopolitical and macroeconomic uncertainty threatens to overshadow all else, it is important to recognise and celebrate the industry’s resilience and success stories. This year’s PEI Awards, unveiled this morning, do just that. From an initial 18 Europe-focused categories, our annual awards – now in their 20th year – have grown to 72 categories, and remain the industry’s only honours decided solely by those in the sector, who vote in their thousands.

Among this year’s winners is an exit that generated a 90x multiple for its Chinese owner; a global powerhouse that delivered $3.3 billion worth of impact investment in a single year; and – in a twist of fate – a Ukraine-based GP recognised for a flurry of exits in Central and Europe. Check out our full list of winners here.

2-and-20 vision
The US Securities and Exchange Commission’s potentially ‘earth-shattering‘ proposals for private funds may well have been designed with investors’ best interests in mind, but not all its suggestions are sitting right with LPs. One point of contention appears to be the regulator’s suggestion that the 2-and-20 model be scrapped on the basis that it would encourage GPs to consider more efficient models in which the investor gets a larger share of the returns.

The Office of the Treasurer of Connecticut State, which manages the $44 billion Connecticut Retirement Plans and Trust Funds, and has a 10 percent target allocation to private equity, is among those wary of such an intervention. “Compensation structures should be left to market participants and not subject to regulation,” the Treasurer’s office tells Side Letter. “Unfortunately, we have first-hand experience with the weakening of terms and governance standards for many private fund offerings, and I don’t believe market forces alone will bring these back to levels that are in the best interests of private market investors.”

The Treasurer is, however, in favour of greater transparency around precisely what GPs are charging and why. “Where I think the ‘2-and-20’ model has become misaligned is in the expansive list of expenses that managers previously were responsible for covering out of their management fee but are now charged separately to investors as fund or partnership expenses,” the Treasurer notes.

“To address these concerns, I am fully supportive of the SEC’s push for increased transparency, and the establishment of reporting standards for the amounts and identification of all fees, expenses, and incentive compensation charged to a fund or its investors.”

Do you have an opinion on the SEC’s compensation proposals? PEI‘s Carmela Mendoza would love to hear from you.

Inflexion point
Inflexion Private Equity has gathered £2.5 billion ($3.4 billion; €3 billion) for its sixth buyout fund, PEI reports this morning. Inflexion Buyout Fund VI had a £2 billion target and closed in under a year despite what co-founder Simon Turner described to us as a “brutal fundraising environment” that has left many investors with difficult triage decisions. Fund VI is twice the size of its 2018-vintage predecessor and had a 100 percent re-up rate. Also of note: Inflexion has agreed its first ESG-linked subscription facility for the new fund.

They did the math

BGH’s bucks
Australian buyout shop BGH Capital has collected A$3.6 billion ($2.6 billion; €2.3 billion) for its sophomore fund, according to a Tuesday statement. Fund II launched last year with a A$3 billion target and is more than 38 percent larger than its predecessor. The firm, which is led by former TPG dealmaker Ben Gray, has been busy during the pandemic, emerging victorious in a year-long battle for cinema operator Village Roadshow in December 2020 and acquiring Australian poultry company Hazeldene’s last year. The deals came at a challenging time for Australian PE, which like many other markets, has struggled with stiff competition, overheated valuations and a limited pool of targets.

Essentials

Verdane’s support for Ukrainians
Scandinavian tech specialist Verdane is helping to support Ukrainians displaced by the ongoing crisis. Portfolio company Wunderflats (a German rental agency) has identified more than 3,500 spaces available for Ukrainian refugees, of which 40 percent are offered for free and 90 percent below €500 per month, according to a LinkedIn post.

“As business leaders it is our duty to stand up to the gravest act of aggression on European soil since World War II,” Verdane managing partner Bjarne Lie said in a separate post. “We fully support the sanctions imposed by Western governments, and will ensure compliance in our portfolio, but our thoughts remain first and foremost with the people who are living through this traumatic event.” You can read about how other investors are responding to Russia’s invasion here.

Qiming the market
Chinese venture giant Qiming is seeking $1.4 billion for its eighth USD fund, according to SEC filings. If successful, Fund VIII would be about 17 percent larger than its 2020-vintage predecessor, according to PEI data. Qiming is one of several Chinese VCs that have shot up the PEI 300 in recent years, rocketing from number 200 in 2020 to number 139 last year. This upwards trajectory may be short lived. The Chinese VC market was hit last year by a series of regulatory actions targeting some of the industry’s favourite sectors, including tech and online education, rendering the fundraising process more of an uphill battle as a result.


Today’s letter was prepared by Alex Lynn with Carmela Mendoza