Side Letter: PE’s retail debate; CD&R’s pension concerns; TPG’s IPO

Should PE's love of retail capital be reciprocated? Not everyone seems to think so. Plus: TPG looks set to become the next PE giant to go public and CD&R has encountered pushback from a UK pension scheme. Here's today's brief, for our valued subscribers only.

They said it

“What I’d love to see is LPs say you’re very high-performing and I’m happy to invest in you, but I would like you to work with me in changing how you’re building your team and making progress on gender diversity.”

Nupur Garg, founder of diversity non-profit WinPE and a former regional lead at International Finance Corporation, tells PEI that progress needs to start at the top of the capital chain.

Just happened

The retail debate
Retail capital has been referred to as private equity’s holy grail, but is private equity retail’s holy grail? Ask any of the myriad firms hoping to raise capital from wealthy individuals and their answer is likely to be a resounding yes. Others, such as Jeff Hooke, senior finance lecturer at Johns Hopkins Carey Business School, are less convinced.

PEI senior reporter Michael Baruch recently caught up with Hooke to discuss his upcoming book, The Myth of Private Equity. The former investment banker disputes PE’s claim of outperformance, arguing that investors are often unaware how much they are being charged in total fees, and that some institutions haven’t beaten the performance of a 60/40 stock/bond index in recent decades. His argument is outlined in greater detail here.

Hooke is not the first academic to question PE’s appeal (Oxford University’s Ludovic Phalippou has ruffled more than a few PE feathers in recent years). While there may never be a definitive answer, industry sources are quick to note that the debate often relies on the assumption that public markets will remain strong and attract private companies, and that PE/VC firms won’t continue to hold companies private as long as they are now. Have an opinion? We’d love to hear from you.

Another day, another PE giant exploring an IPO. TPG has appointed Goldman Sachs and JPMorgan Chase to work on a listing and could file documents as early as September, the Wall Street Journal reports. Executives had been contemplating a merger with a special purpose acquisition company for several months, and opted for the more traditional route.TPG follows in the footsteps of PEI Media-owner Bridgepoint, which listed in London this year (more details on that process here), and EQT, which listed in Stockholm in 2019. If successful, TPG’s listing would mean that five of the 10 largest firms in the PEI 300 have gone public.

CD&R’s pension pushback
Clayton, Dubilier & Rice‘s £7 billion ($9.5 billion; €8 billion) bid for UK supermarket giant Morrisons has prompted concerns among the retailer’s pension trustees. In a Tuesday statement, Steve Southern, chair of trustees for the £1.85 billion Morrison’s Retirement Saver Plan and the £3.7 billion Safeway Pension Scheme, warned that the current offers for Morrisons could materially weaken the existing sponsor covenant supporting the pension schemes, citing the additional debt secured with a priority claim ahead of the pensions and increased debt service burden. Southern called for an agreement on an additional security package to protect members’ benefits.It’s not the only part of CD&R’s bid that appears to have raised eyebrows. The deal could also face scrutiny from the Competition and Markets Authority in relation to the number of petrol stations it owns, according to the Daily Mail. CD&R’s ownership of Motor Fuel Group, the UK’s largest petrol station retailer with 900 stations, may prove problematic if combined with the several hundred held by Morrisons, the report said.


Swensen’s successor
Yale University has found someone to replace David Swensen, the legendary CIO who passed away this year. The top job has gone to 36-year-old Matthew Mendelsohn, Yale’s venture capital director, per a statement. The endowment’s VC holdings have returned 21.6 percent per year over the past 10 years and accounted for 25 percent of its $31 billion portfolio as of June 2020. Mendelsohn has big shoes to fill; his predecessor, a “titan” of institutional investment, is credited with making alternatives an integral part of public portfolios. More on Swensen’s legacy here.

Primavera in Palo Alto
China’s Primavera Capital Group has planted its flag in the US. The firm, which invests from VC through to buyouts, set up shop in Silicon Valley, per a Wednesday LinkedIn post. Primavera’s portfolio includes Alibaba, ByteDance and ride-hailing company Didi. The firm held the final close on $3.4 billion for Primavera Capital Fund III in 2019 – one of China’s largest funds to date – and is understood to be seeking up to $5 billion for a successor.

Looking to get in on the China action but unsure where to start? Check out our recent list of five firms you should really get to know.

Dig deeper

Institution: Santa Barbara County Employees’ Retirement System
Headquarters: Goleta, US
AUM: $3.91 billion
Allocation to alternatives: 28.75%

The Santa Barbara County Employees’ Retirement System has committed $60 million across five private equity vehicles, according to the pension’s quarterly investment reports.

The commitments comprise $15 million each to Melody Communications Infrastructure Fund II and Sustainable Asset Fund III, along with $10 million each to Hellman & Friedman Capital Partners XMidOcean Partners VI and STG Allegro-A.

SBCERS is on course to achieve its targeted commitments of $75 million to $85 million as part of its strategic plan to achieve a private equity allocation of 10 percent. The pension’s pacing plan was previously reported by Private Equity International.

The pension’s recent commitments have been made to buyout funds targeting investments in North America, Asia-Pacific and Europe.

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

Today’s letter was prepared by Alex Lynn with Carmela Mendoza and Michael Baruch.