Side Letter: Rede’s liquidity index; PE’s comp crunch; ex-Rhône trio Px3’s first close

We see divergent takes on how LPs really feel about PE deployment next year. Plus: a trio of former Rhône Group execs have reached a first close on their debut fund; and private equity bonuses could be on the decline this year. Here’s today's brief, for our valued subscribers only.

Just happened

LP commitments: Drying up in 2023?

A mixed picture
Two pieces of industry research published this week paint two very different pictures of LP sentiment towards private equity. Just two days ago, a survey by Montana Capital Partners found that 97 percent of investors plan to either maintain or increase their allocations to PE over the next 12 months, with just 3 percent saying they would decrease their allocation. “The current market uncertainties have not impacted the appetite of respondents for the asset class,” Montana noted in its report.

Meanwhile, Rede Partners’ latest liquidity index, out this morning, shows that LPs on average plan to decrease their capital deployment to the asset class. More than one-third (35 percent) of institutional investors plan to lower their deployment to PE funds over the next year. Gabrielle Joseph, head of due diligence and client development at the placement agent and advisory firm, attributes the slowdown in fundraising momentum to rising caution due to “increased market volatility” and LPs’ expectations of a fall in distribution volumes and fewer exits.

So, two very different snapshots of LP sentiment in the space of one week. It’s unclear how much overlap there is among the respondents to the two reports – Montana surveyed close to 70 while Rede’s includes responses from 115.

Our take: uncertainty and volatility are clearly top of LPs’ minds, which may be the reason behind such a mixed picture. When things are uncertain, there is no one right approach – and clearly, as the two surveys’ results show, investors expect they’ll tackle it in different ways. Keep an eye out for our special report on this very subject, coming out in the next few weeks.

Px3’s progress
Mid-market firm Px3 Partners, founded last year by a trio of ex-Rhône Group execs, held a first close on its debut fund last month, per an investor email seen by Side Letter. The London-based firm, formed by Gianpiero Lenza, Sébastien Mazella di Bosco and Petter Johnsson, has closed and reserved more than €250 million en route to its €750 million target. Px3 Partners I is anchored by a blue-chip US multi-family office. Px3 declined to comment.

The fund will invest at least €50 million each in about six to eight companies in the business services, consumer and leisure, and industrials sectors. It will pick up both majority and minority stakes in companies with EBITDA of up to €75 million, Side Letter understands.

PE’s comp crunch
A tighter fundraising environment and dealmaking slowdown is hitting PE where it hurts: the pocket. Incentive compensation, including equity and annual bonus but excluding carry, for PE dealmakers in the mega-cap space, is expected to come down by between 5 percent to 10 percent for 2022, according to projections from compensation consulting firm Johnson Associates.

Those in the mid- to large-cap space could feel the pinch even further, with compensation expected to slip by 10 percent to 15 percent. This is excluding the impact from inflation. For other corners of financial services, projections are mixed. Macro hedge funds and fixed income professionals can, according to Johnson, expect healthy rises to their incentive compensation this year; for investment bankers and traditional asset managers the picture is rather bleak.

Talent management and compensation have proven thorny issues, particularly among PE’s LP community, this year.  Alaska Permanent Fund Corporation launched a salary review earlier this year after a spate of senior departures. Its peers, meanwhile, have seen a game of musical chairs at the top level, as Side Letter noted last month.


Sub line scrutiny. Subscription credit lines with interest rates tied to ESG metrics have proliferated in recent years (CarlyleEQT and BPEA EQT having been among the early adopters). However, as regulatory scrutiny of ESG grows – a state of affairs that has been catalysed by several high-profile ESG scandals – lenders have become more wary of such facilities. That’s according to our colleagues at Private Funds CFO, who report that increased caution has led some would-be borrowers of ESG-linked lines to switch to conventional ones during the transaction process (registration required).

Wesley Misson, head of fund finance in the US for law firm Cadwalader, Wickersham & Taft, has seen this happen first-hand. Cadwalader closed eight ESG-linked facilities last year, compared with just four so far this year, he told PF CFO. Although the firm is working on two more facilities, Misson said Cadwalader might have met or surpassed its 2021 figure were it not for flips of some ESG-linked sub lines to regular ones during their transaction processes.

One reason for this reticence is that banks don’t receive breaks on their risk-based capital requirements for ESG lending, which means pricing discounts lower their capital without a benefit in return. Some lenders are even reassessing existing lines they extended last year to see if they still qualify as ESG as regulators issue clearer guidance around the topic; newer ESG-linked sub lines are proving more thoughtful, typically incorporating broader ESG frameworks instead of one or two KPIs. So, while their use is unlikely to diminish significantly, more care and attention may be put into their formation moving forward.

While we’re on the subject… Europe’s financial watchdogs – the European Banking Authority, European Securities and Markets Authority, and European Insurance and Occupational Pensions Authority, collectively known as the European Supervisory Authorities (ESAs) – are asking market participants to help them identify specific forms of greenwashing, our colleagues at Responsible Investor report (registration required). The survey produced by the ESAs will run until 10 January and will address the financial sector as a whole.

Mira Lamriben, bank expert ESR in the EBA’s economic and risk analysis department, told RI that the objective of the survey was to understand the “key features, key components [and] transmission channels” of greenwashing. She added that the ESAs, which have a clearer understanding of what is happening in the investment services space in terms of greenwashing, “lack a bit of knowledge” in other areas of financial markets.

Greenwashing – making unsubstantiated claims that a company’s products or operations are environmentally friendly – has been in the line of fire for many financial authorities globally. The Australian Securities and Investments Commission said last month that super funds in the country are among those it is investigating for potential greenwashing, while the UK recently proposed requirements for ESG funds in order to stamp out “exaggerated, misleading or unsubstantiated sustainability-related claims”.

Today’s letter was prepared by Alex Lynn with Adam LeCarmela MendozaHelen de Beer and Madeleine Farman