Side Letter: PE’s pricing panic; BlackRock’s long, long-hold; RidgeLake’s Gauge stake

Our recent carried interest survey shows an industry concerned about alignment and valuations. Plus: why BlackRock's latest secondaries deal represents a long, long-hold and GP stakes business RidgeLake has backed a US mid-market firm. Here's today's brief, for our valued subscribers only.

They said it

“If firms did not have a growth strategy, growth is now firmly embedded into what they’re doing.”

Delaney Brown, managing director at CPP Investments, tells delegates at Wednesday’s BVCA Summit 2021 that the proliferation of growth strategies isn’t limited to those with dedicated funds.

Just happened

Pricing panic
Private Equity International spent the past couple of weeks surveying 90 fund managers and lawyers to ascertain how their business might be impacted by an overhaul to carried interest. While the answers were resoundingly negative, with alignment of interest and the industry’s appeal among the chief concerns, it wasn’t the biggest fear on executives’ minds. Rather, extreme valuations are the issue keeping two-thirds of respondents awake at night when it comes to delivering returns.

It is telling that interest rate hikes were the third biggest concern. Some of the industry’s top names have warned that such a move, combined with today’s frothy pricing, could spell trouble for PE. “For those for whom it’s been the best of times, eventually something will end,” Carlyle Group‘s David Rubenstein told TechCrunch last month. “At some point, the Federal Reserve will increase interest rates… [and] people begin to say, ‘I’m taking more of my chips off the table. I’m not going to invest as much at these valuations’.”

Below are some other key findings from the survey, the results of which you can read in full here.

  • Nearly 70 percent say a higher tax rate for carried interest would be detrimental to alignment with their investors.
  • Just under 80 percent said increasing the tax rate would make PE a less attractive career path.
  • More than 10 percent are already in various stages of tax planning with their legal counsel, including exploring moves to friendlier jurisdictions.

The long hold’s long hold
A continuation fund on a continuation fund – that’s what BlackRock’s latest secondaries deal was all about, our colleagues at Secondaries Investor are reporting (registration required). The world’s largest asset manager led a process to move Denver-based Flagship Food Group into a separate vehicle which will continue to be managed by CREO Capital Partners, per a statement. Sixpoint Partners advised on the transaction. Flagship Food has been held in a vehicle created in 2018 that itself arose out of a continuation fund process. With these types of deals expected to pop up even more, sponsors must have a doubly compelling case the second time round.


RidgeLake Gauges interest
GP stakes specialist RidgeLake Partners has agreed to acquire a minority interest in US mid-market firm Gauge Capital. “As the largest investor in their own funds, Gauge has built strong alignment with their investors, portfolio companies and employees,” said RidgeLake co-head Michael Lunt in a Wednesday statement. “We are excited to help Gauge further strengthen this alignment going forward.” RidgeLake is one of the newest entrants to the GP stakes universe, having been formed last year through a partnership between alternatives manager PA Capital and Ottawa Avenue Private Capital. In July, the firm teamed up with Blackstone to acquire a stake in Sentinel Capital.

Apollo hires sustainability chief
Apollo Global Management has hired Dave Stangis as its first chief sustainability officer, per a statement. Stangis will lead Apollo’s ESG programme, which includes an annual report, and climate action and employee engagement efforts across its portfolio. The $472 billion AUM private markets giant, which has private credit, PE, infrastructure and real estate portfolios, has developed a proprietary ESG scoring system for its lending platform. Stangis will report to co-presidents Scott Kleinman and Jim Zelter. Apollo is raising its first impact fund, which has a $1 billion target. It made its first investment in July, our colleagues at New Private Markets reported (registration required).

Dig deeper

Institution: Texas County and District Retirement System
Headquarters: Austin, US
AUM: $40.8 billion
Allocation to alternatives: 52.6%

Texas County & District Retirement System has committed $135 million across four private equity vehicles, according to the pension’s latest investment activity.

The allocation comprises $75 million to Marlin Heritage Fund III, $25 million to Spectrum Select Opportunities Fund I, $18 million to Lightspeed China Partners V and $17 million to Lightspeed China Partners Select II.

Lightspeed Venture Partners launched both of its venture vehicles in August seeking $950 million in total ($450 million for LCP V and $400 million for LCPS II). Like its predecessors, the funds will seek early-stage technology companies and growth investments in China. TCDRS had previously committed $10 million across both of the predecessor funds.

The $40.8 billion public pension fund has a target allocation of 25 percent to private equity, which presently stands at 21.7 percent. Earlier this year, Private Equity International had outlined the pension’s revised investment policy for fiscal 2021.

The pension’s recent fund commitments have predominantly targeted VC and buyout vehicles across North America and Asia-pacific.

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

Today’s letter was prepared by Alex Lynn with Rod JamesToby Mitchenall and Carmela Mendoza.