Side Letter: PE’s entry barrier; Pictet’s double close; Niche index update

Monday is a bank holiday in the UK due to King Charles's coronation this weekend, so Side Letter will return on Tuesday. For now, institutional investors face a knowledge gap when pondering an entry into private markets. Plus: nice news for niche investors. Here’s today's brief, for our valued subscribers only.

Just happened

Mind the knowledge gap
Team Private Equity International spends much of its time speaking with LPs that have – albeit to varying degrees – already drunk the alternatives Kool-Aid. It was something of a novel experience, then, when Side Letter recently sat down for coffee with a senior executive at a global insurer that has so far eschewed the private markets. When asked whether they had plans to enter this space, the executive noted that – in addition to having a somewhat-conservative risk appetite – talent, or rather a lack thereof, was their largest barrier to entry.

Specifically, the executive said the institution lacked staff with the knowledge of how to mitigate the J-curve, or how to build and due diligence GP relationships, among others. When Side Letter pointed to the existence of highly sophisticated, full-service investment advisers and outsourced CIOs, the executive suggested that such a solution was only “short-term” in nature.

“The knowledge of private equity is kept with those advisers – we don’t learn from it, and it doesn’t solve the problem for us in the long term,” they noted.

The insurer won’t be the first to have these concerns, nor will it be the last. There is, however, something to be said for a project, and – should the institution decide to take the plunge – Side Letter wouldn’t be surprised if there were senior LP executives out there seeking a new challenge and a blank canvas upon which to make their mark. In the meantime, GPs on the hunt for new LP relationships will have to make peace with the fact that some sizeable institutions remain just out of reach.

Pictet double fund close
Swiss investment manager Pictet Alternative Advisors has gathered $2.5 billion across two funds – $1.6 billion for fund of funds vehicle Monte Rosa VI and $900 million for its fifth dedicated co-investment vehicle, per a release seen by Side Letter. Monte Rosa VI is $400 million more than the amount it raised for its $1.2 billion, 2019-vintage predecessor. Capital raised for the vehicle will primarily make buyout fund commitments in North America and Europe-focused GPs. It has a smaller allocation to venture, growth strategies and Asia-based managers, and earmarked between 20-30 percent of co-investments and secondaries, according to the statement.

Pictet has deployed more than 70 percent of the fund already, it is understood. Co-investment V, meanwhile, will be deployed across 30 minority deals alongside Pictet’s GPs. Pictet has backed funds managed by EQTBC PartnersForbion and Apax PartnersPEI data shows. Commenting on the fundraise, Maurizio Arrigo, global co-head of PE, said that capital raising was driven by its wealth management business and institutional investors in Europe. He noted, however, that inflation and the tough macro environment will impact PE returns overall.

“It was fairly easy for GPs to deliver good returns over the last five years. Everybody had very good returns, both in buyout and venture or growth. And now, the times are much more difficult with multiples that contract, with uncertainties about the macro and inflation that start to dent companies’ margins, as well as debt, which is difficult to find and very expensive,” Arrigo said. “The gap between the very good managers and the OK ones will widen dramatically in this environment. We’re being very selective and make sure we back GPs we believe will deliver despite the more difficult times.”

Niche news
Investing in funds with specific strategies as opposed to broad mandates can deliver higher returns, according to research from secondaries and fund of funds specialist Mantra Investment Partners. Niche PE funds delivered an average of 39 percent internal rate of return and a 2.1x multiple-on-invested-capital in the decade to 2020, compared with a 19 percent return and a 1.7x MOIC for mainstream PE funds. Mantra, which, we must note, describes itself as a niche investment firm, defines ‘niche’ as typically being a sector specialist such as focusing on aerospace and defence, cybersecurity or food and agriculture, for example. “The common thread running through all niche PE portfolio companies is that they are off the radar of most non-sector specialists,” Mantra noted. Details here.


Putting up with it
One of PE’s best defences against inflation has been to back companies with the ability to pass costs on to consumers. How exactly can firms ensure that the businesses they’re eyeing will be able to do this without alienating customers? Pacific Equity Partners, one of Australia’s oldest buyout shops, reckons it has the answer. Speaking at the Macquarie Australia Conference on Wednesday, managing director Rohan Wolfers told delegates that customers of market leaders are more likely to tolerate such changes.

“We’re looking for businesses with strong pass-through,” he said. “The obvious piece for me is that if you buy a market-leading business with a really strong market position and a differentiated offering, then your customers kind of have to put up with [it] when you push those input cost, price movements through.

“So think about, for example, a business with 50 percent market share, and… very few substitutes for its products – it’s very likely to pass through input pressure. Well, if you think about a business with a 2 percent market share in a largely commoditised industry… its success and failure is going to be at the whims of what its larger competitors do, and that’s a pretty vulnerable position to be in frankly.”

Multiples’ millions
India’s Multiples Alternate Asset Management has raised over $640 million in a first close for its fourth flagship fund, per a Wednesday statement. It has so far secured commitments from family offices, insurance companies and institutional investors such as the International Finance Corporation and CPP Investments. Launched in September last year, Fund IV is seeking $1 billion at final close in the coming five months, according to the The Economic Times.

The Mumbai-based firm has invested in more than 30 Indian businesses through buyouts and growth equity. Its portfolio includes Fintech company Acko and pharmaceuticals brand BDR Pharma.

Multiples raised $685 million against a $750 million target for its 2021-vintage Fund III. Should it reach its target, the latest vehicle would be the firm’s largest ever and would thrust near the small pool of billion-dollar Indian-focused funds raised by local GPs.

Dig deeper

Institution: Government Employees Pension Service (GEPS)
Headquarters: Jeju-do, South Korea
AUM: 6.28 trillion won
Allocation to alternatives: 34.91%

Government Employees Pension Service (GEPS) has issued a request for proposals from global private equity fund managers with buyout or growth strategy.

The firm aims to commit $120 million to two or three managers. Their funds should allocate at least 80 percent to North America and/or Europe, while funds that allocate over 80 percent to a single sector will be excluded. The funds will have a target size of at least $4 billion at final close and the firms should have run their businesses for at least 15 full years.

The submission deadline is 17 May with a decision put to the investment committee in July.

The 6.28 trillion won ($4.69 billion; €4.25 billion) South Korean government employees’ pension has a 34.91 percent allocation to alternative investments.

For more information on Government Employees Pension Service, 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 Katrina Lau.