Side Letter: SEC has PE in the crosshairs; CalPERS’ co-investments; DE&I in action

The SEC is proposing big changes to how the private equity industry operates. Plus: Inside CalPERS' pivot to co-investments and customised accounts and a look at PE's progress when it comes to woman and minority-owned firms in the US. Here's today's brief, for our valued subscribers only.

They said it

“I don’t see any big, gigantic market correction of the type that’s going to push us into a recession. I don’t see that at all. I think the market correction will be modest, relative to what we’ve seen in the past when you have a gigantic correction.”

Carlyle Group co-founder David Rubenstein plays down inflation fears in an interview with CNBC.

Just happened

Is the party coming to an end?
If you haven’t been following developments in Washington DC over the last 24 hours, the news is that the US Securities & Exchange Commission voted yesterday to put a wide range of proposals related to the private equity industry to public comment. The proposals, contained in a 341-page document, include:

  • Requiring GPs to provide LPs with quarterly statements
    about fund performance, fees and expenses;
  • Mandating the use of independent third-party fairness opinions on GP-led secondaries processes;
  • Prohibiting certain fees being charged to LPs, such as accelerated monitoring fees; or making LPs pay for the tax a GP has incurred on its carried interest, in the event of a clawback situation;
  • Levelling the playing field by forcing GPs to disclose any preferential treatment to some LPs (such as discounted management fees) to all current and potential LPs.

Some of the proposals would apply to GPs who are not even registered with the SEC. The document also appears, though it’s not 100 percent clear, to be considering prohibiting NAV-based loans. There’s a lot to examine in the SEC’s proposals and we’ll be updating readers with further coverage. For now, check out this piece by affiliate title Buyouts editor Chris Witkowsky, which includes insight from former co-head of the SEC’s private funds unit Igor Rozenblit, who warns that the rules are written broadly and could capture practices not intended to fall under the scope of the rules. Some market participants we’ve spoken to since yesterday’s vote expressed surprised that it has taken this long for the US regulator to focus explicitly on PE fees.

We’ve long argued that greater transparency and disclosure is key to ensuring the long-term health of the private equity industry. We would welcome your thoughts on yesterday’s proposals: get in touch here.

CalPERS’ co-investments
A new report shines a light on the California Public Employees’ Retirement System‘s recent push into co-investments. The $490 billion institution completed 19 transactions worth $3.8 billion via co-investments or customised accounts between July and December, per an H2 2021 PE review prepared by investment consultant Meketa. It made $3.6 billion of blind-pool commitments over the same period.

Overall, the plan returned 39.3 percent as of 31 December over a one-year period, beating its benchmark by 790 basis points. Fund interests returned 42.3 percent in the period; beating co-investments at 36.3 percent and customised accounts at 32.5 percent.

Building a robust co-investment programme is a strategic priority for CalPERS, head of investment for private equity Yup Kim told Private Equity International last month, noting that such transactions offer efficient exposure to the asset class along with a slew of other benefits for mature LPs. The fund portfolio might have been its top driver of PE returns last year, but with the pension understood to be shopping up to $6 billion in the secondaries market to reallocate elsewhere, that balance might soon shift.

DE&I in action
Diversity-focused VC firm Fairview Capital published the findings of its latest report on woman and minority-owned firms in the US this week. Here are some key takeaways from 2021:

  • The universe of woman and minority-owned firms had grown to 627 firms at year-end, up 25 percent on the prior year and a 6x increase from the roughly 100 firms recorded in 2014.
  • A record 280 of these were raising capital last year.
  • Some 63 percent of firms in market last year were raising first-time funds, with 22 percent on Fund II and only 16 percent on Fund III+.
  • The majority (76 percent) of firms in market were raising VC funds.
  • The median fund size for woman and minority-owned firms in the market in 2021 was $100 million, up from $75 million in 2020 but still short of the $170 million industry-wide median.


Finnfund, Kenya spare a dime?
Finnish development finance institution Finnfund plans to open its first regional office in Kenya, per a statement. The institution will deploy up to three investment professionals in Nairobi in May, with Africa set to account for half of all Finnfund’s upcoming investments. Finnfund invests €200 million to €250 million in 20 to 30 companies throughout developing countries each year, with a particular emphasis on renewable energy, sustainable forestry, sustainable agriculture, financial institutions, and digital infrastructure and solutions. Its investments and commitments total about €1.1 billion.

Nuveen to see here
Investment management firm Nuveen has closed its first PE impact fund on $218 million, undershooting its initial target of $400 million, affiliate title New Private Markets reports (registration required). The firm held a first close for the Nuveen Global Impact Fund back in July 2020 on $150 million and has so far made two investments from the fund. In a statement about the fundraise, Rekha Unnithan, co-head of private markets impact investing at Nuveen, said she was “proud to build on the momentum” of the 2020 first close. Nuveen did not respond to NPM’s request for comment on the length of time it took to raise the fund or why it closed below its initially stated target.

Sky’s the limit for new venture
Media scion James Murdoch has teamed up with Uday Shankar, former president of Walt Disney Asia-Pacific, to launch Bodhi Tree, an investment platform backed by the Qatar Investment Authority. The roughly $328 billion sovereign wealth fund has committed up to $1.5 billion to the venture, which will target media and consumer tech businesses across Southeast Asia, with a particular focus on India, according to a statement. It comes amid an explosion of private investments across the latter, for which firms have been aggressively hiring. More on that dynamic in Monday’s Side Letter.

Dig deeper

Institution: Florida Retirement System Trust Fund
Headquarters: Tallahassee, US
AUM: $201.9 billion
Allocation to alternatives: 26.5%

Florida Retirement System Trust Fund has approved $636 million-worth of commitments across eight private equity vehicles, according to the pension’s Q4 managers report.

The commitments comprise:

The commitments to Stride ConsumerAegon Asset Management, and WindRose Health Investors marks new manager relationships for the US public pension fund. Cambridge acted as the investment consultant for the private equity transactions.

FRS trust fund has a 6 percent target allocation to private equity, which currently stands at 9 percent.

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

Today’s letter was prepared by Alex Lynn with Adam Le and Michael Baruch.