Side Letter: PE’s Licence to operate, China lockdown, Temasek’s approach

PE is taking a look at itself and asking questions about transparency, responsibility and its licence to operate. Plus: Temasek on GP relationships, coronavirus in China, regulatory change in Europe and news from 3i and ICG. Here’s today's brief, for our valued subscribers only.

Just happened

Mirror, mirror on the wall

Virginie MorgonThe private equity industry is in introspective mood. Eurazeo CEO Virginie Morgon yesterday stood in front of European conference delegates and urged her peers to take responsibility for issues like climate change and income inequality. The PE industry is now of such scale that “we have to understand that we are right there. It’s not the banks anymore, it’s us”. Likewise, she described a lack of gender diversity as a clear industry failing: “It has to be a joke. It’s a disgrace. We have to face it. We have to make some changes.”

We’ve been exploring the theme that private equity’s “licence to operate” cannot be taken for granted. The concept is challenging. PE fundraising once again broke records last year, according to our data (download available here), suggesting all is well. So what could curtail further growth? Opinions vary.

One industry leader told us this week that their firm is currently working out how to engage stakeholders, particularly portfolio company employees, more effectively. Why? Because if people aren’t excited to work for a PE-owned business, the industry will not be able to fulfil its potential as a more significant part of capital markets.

For Carl Thoma, co-founder of both GTCR and Thoma Bravo, the problem is one of image. Conspicuous displays of personal wealth have made PE a scapegoat for the “anti-wealth” movement, he told us. Industry leaders need to stop outsourcing their story-telling to PR agents and lobbyists, and personally deliver stories of portfolio company success to political representatives.

For Richard Hope, who took the reins of Hamilton Lane‘s EMEA business this year, transparency with investors is the answer. “I think, increasingly, LPs want to understand what’s inside that black box, the way private equity firms manage investments and the ‘good citizen’ part of that in terms of owning those businesses,” he told PEI’s Adam Le this week.

For many it seems like a blind spot. Said Emmanuelle Duten, editor-in-chief of Capital France and moderator of an IPEM panel this morning on the “reputation issues of the private equity industry”: “I thought there would have been more people in the room.”

Are concerned about private equity’s reputation? Get in touch: isobel.m@peimedia.com

How to make your LP presence felt

It’s hard to imagine an investor with a $230 billion portfolio struggling to catch the attention of GPs, but try telling that to Temasek. Speaking on a panel at IPEM, senior managing director of Temasek International Europe Benoit Valentin said the asset manager has been shedding GP relationships in order to focus on a select few. “We tend to be a smaller LP in the GP Rolodex so we have to sweat twice as much,” he said. While a majority of Temasek’s portfolio is minority positions acquired on a direct basis, it invests in funds in order to gain access to co-investments outside of its sweet spot, he said. Watch out for PEI’s February cover story in which we get an inside look at the Singaporean giant’s plans for PE domination in North America.

Hands off the AIFMD

The UK formally leaves the European Union tomorrow and will immediately enter an 11-month transition period. For industry bodies Invest EuropeBVCA and France Invest the top priority is to effectively communicate to policymakers the need to keep capital private capital markets functioning. “Our job is to explain to policymakers that you don’t change something that isn’t broken,” said Eric de Montgolfier, chief executive of Invest Europe, in IPEM 2020 on Wednesday. “Basically, you don’t touch the Alternative Investment Fund Managers Directive because we’ve been accustomed to it.”

China on hold

The World Health Organisation will decide today whether the coronavirus outbreak, which has caused more than 130 deaths so far, constitutes a global health emergency. As China fights to contain the virus, one Hong Kong-based placement agent that raises capital for Chinese PE funds tells PEI that everything is “on hold countrywide”, with all trips cancelled or indefinitely postponed. Another placement agent says new activity was paused but existing meetings would be rearranged to conference calls, and an executive at a China-focused GP with an office in Shanghai tells us staff have been asked to work from home for at least two weeks. China already has more cases of coronavirus than it did SARS in 2003 – an event that wiped $40 billion off world markets.

Essentials

3i closes Action deal. Listed investor 3i Group updated the market on performance this morning, noting it had closed its single-asset secondaries deal realting to retailer Action (the jewel in its PE portfolio crown).

ICG steps up secondaries fund size. ICG, another listed firm, closed the “third vintage of [its] strategic equity strategy in January at €2.0bn of third party commitments, with €0.4bn raised in the quarter”, it said in results this morning. “This is a significant increase on the prior vintage and demonstrates the scalability of this strategy.”

Dig deeper

Institution: Arizona Public Safety Personnel Retirement System
Headquarters: Phoenix, United States
AUM: $11.18bn
Allocation to alternatives: 50.79%
Bitesize: $10-50m

Arizona Public Safety Personnel Retirement System committed $120 million to StepStone AZ China and Asia Opportunities Fund II. The vehicle will be used by StepStone Group to invest in diversified sectors throughout the Asia-Pacific region.

The $11.18 billion US public pension has a 14 percent target allocation to private equity that currently stands at 12.08 percent.

For more information on Arizona PSPRS, as well as more than 5,900 other institutions, check out the PEI database.

Arizona portfolio chartHe said it

“It’s stunning that we mimic the Yankees and continue to be admiring of China. We are who we are… We need to play to our strengths.”

Pascal Cagni, president of public investment agency Business France, on European VC’s identity crisis.


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Today’s letter was prepared by Toby MitchenallIsobel MarkhamAdam LeRod JamesCarmela Mendoza and Alex Lynn.


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