Side Letter: PE’s top growth funds; APAC’s deal drop; ESG’s cost controversy

Just happened

HEC Paris: ranking PE’s greatest growth firms (Source: Getty)

Growth greats
Want to back a winning growth fund? Look to North America. That’s according to research from HEC Paris Business School and DowJones, which sought to identify private equity’s best-performing growth managers. The result? North America-based firms dominated the list, accounting for eight of the top-10 managers.

The study – spearheaded by professor Oliver Gottschalg of HEC Paris – examined performance data from 208 growth capital firms and the 390 funds with a capital raising total of $245 billion. The ranking lists the world’s top PE firms that had raised more than $100 million over a decade in terms of aggregate performance and is based on all their growth capital funds raised between 2009 and 2018.

Some of the names in the ranking’s top 10 may already be familiar; others, less so. For those keen to learn more about PE’s growth equity greats, click on the database profiles below:

1. Ampersand Capital Partners
2. Spark Capital
3. Spectrum Equity
4. Clairvest Group
5. Riyada Managers (formerly part of Abraaj Group)
6. Ten Coves Capital
7. Whiz Partners
8. Bregal Sagemount
9. Insight Partners
10. Summit Partners

Emerging trends
What are emerging managers’ priorities over the next 12 months? According to a survey by Dynamo Software – a software provider aimed at the alternatives industry – it’s increasing internal headcount. Most emerging managers  – 88 percent – said they would not be altering their fee structure to pay for top talent; instead, cost reduction is the strategy of choice. Here are the other priorities as published in Dynamo’s Trends, Challenges & Insights from Leading Emerging Managers survey:

  • Fintech remains important. After increasing headcounts, third-party data providers and technology platforms are the two most important areas of investment. Emerging GPs said they would not slash tech budgets, and 51 percent expect to increase their budget for this segment in the next 12 months.
  • Private wealth a priority. Over the last 12 months, 32 percent of emerging managers raised the largest proportion of their capital from HNWIs, with 21 percent raising the most from family offices.

Armen to private wealth
It seems everyone in PE wants a piece of the private wealth pie. GP stakes firm Armen is no exception. The European firm last week acquired a 30 percent stake in French digital platform provider Private Corner. The acquisition is Armen’s second following its strategic partnership with French energy transition infrastructure specialist RGreen Invest, disclosed in April.

Founded in 2020, Private Corner offers the wealth management and private banking community and their clients access to private market funds via its platform, which has 25 funds and serves more than 1,800 individual investors globally through its 250 distribution partners. Its AUM has grown to over €400 million, according to a statement.

Armen has stayed true to its own investment thesis, selling a stake in itself to a group of French family offices earlier this year, PEI reported in March. The firm has already held a €150 million first close on its debut vehicle, Armen GP Stakes Fund I, which is targeting €400 million with a €500 million hard-cap. It was founded last year with president Dominique Gaillard, who spent more than two decades at Ardian; chief executive Laurent Bénard, who spent 17 years at Capza; and Renaud Tourmente, who most recently was head of business development and COO of Capza, at the helm.


APAC’s deal drop
Asia-Pacific’s deal activity fell by 28.3 percent year-on-year in the first quarter of this year, according to GlobalData. There were only 4,472 merger and acquisitions, PE and venture financing deals announced in the first three months, compared with 6,235 deals announced in the same period last year.

New Zealand saw the largest decline of any APAC market, at 50.6 percent, followed closely by Indonesia’s 47.9 percent. China’s deal activity only dropped by 18.2 percent compared with Q1 2022, though the country’s deal activity was already comparatively muted last year due to strict pandemic measures and regulatory risks.

“Although the deal activity in the APAC region was in line with the global trend amid volatile market conditions, it was relatively better compared to other regions,” GlobalData’s lead analyst Aurojyoti Bose said in a statement.

Venture financing suffered the largest drop in deal volume at 34.5 percent, compared with a 20.1 percent decline in M&A, and 27.8 percent in PE. That aligns with investors’ diminished appetite for early-stage funds in a time of market volatility, as they seek safer bets.

ESG’s continuing cost controversy
The costs associated with ESG monitoring and reporting are the subject of continued industry debate, our colleagues at New Private Markets report (registration required). “One thing I am seeing in terms of fund terms is a debate between GPs and LPs about who bears that cost,” said Stephen Newby, a partner at law firm Herbert Smith Freehills, during a webinar on compliance with EU SFDR.

It is unclear if the cost of monitoring investments and reporting is part of the GP’s overhead – borne out of its management fee – or a fund expense passed on to the LPs over and above the management fee, Newby continued. “I don’t think there is an answer to that in the market yet… We are certainly seeing ESG reporting costs being expressly identified as fund expenses, with some pushback from LPs, who say ‘well actually this is all now part of the ordinary course of business and the GP should be staffed up to bear that’”.

Increasing data collection requirements are leading to friction between those GPs that are willing to bear the additional cost, and those looking to pass it on to their LP base, Side Letter noted last month. Speaking at March’s Infrastructure Investor Global Summit in Berlin, Ben Alves Walters, senior investment director at Cambridge Associates, said: “With respect to the quality of data, there is definitely an elephant in the room, which is: the [higher] quality it is, the more costly it is to extract.”

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

15 May

16 May

17 May

18 May

19 May

Today’s letter was prepared by Alex Lynn with Carmela Mendoza, Helen de Beer, Madeleine Farman and Katrina Lau.