Side Letter: The rise of iCapital, SEC’s warning shot, Hillhouse on aligning PE with society

One of the themes du jour in the world of PE fundraising is how to open the institution-dominated asset class to individual investors, whether it is mass affluent savers or HNWIs. We caught up with the CEO of iCapital – a prominent platform connecting GPs and rich individuals – to discuss what seems to be a transformative year for the company. Here's today's brief, for our valued subscribers only.

He said it

“I can’t see any reason why it’s not going to continue like this.”

Jason Zemmel, a partner at law firm CMS, explains in the UK’s Daily Telegraph (paywall) that the shrinking number of companies on public stock exchanges is likely to continue, given the tailwinds behind PE investment.

Just happened

A busy year for iCapital

Fintech platform iCapital Network has been busy this year. The company is among the leaders in the emerging brave new world of connecting HNWI money with private capital managers. So far it has acquired Wells Fargo’s alternatives feeder fund platform and tech company Artivest. It also partnered with State Street and PGIM Investments to offer private markets products to HNWIs. In case you didn’t know: iCapital’s backers include BlackstoneBlackRockHamilton Lane and a bunch of other PE and banking heavyweights. It has more than 200 GPs on its platform and close to 500 funds and client assets on the platform have skyrocketed from $300 million in 2015 to $52 billion today.

The business has grand plans, says chief executive Lawrence Calcano. It launched a partnership with NASDAQ to offer liquidity opportunities to investors, and has “on-going efforts to drive end-to-end automation by establishing digital, paperless connectivity with transfer agents, custodians and administrators”. With the world tilted towards remote working, it’s a good time to be part of the automation wave currently washing over the PE industry. Says Calcano: “We are seeing an uptick in client interest – GPs and distribution platforms – as a result. No one really knows [what the working environment will be like] post-covid between in-office and out-of-office, and that just puts a premium on an automated infrastructure.” Read Carmela’s Q&A here.

Risk in the time of covid

The US financial regulator has made it clear that private fund managers need to up their compliance game during the pandemic: “Market volatility related to covid-19 may have heightened the risks of misconduct in various areas that the staff believe merit additional attention,“ wrote the SEC’s Office of Compliance Inspections and Examination in an eight-page note to the market. The alert addresses six broad categories. Beyond protecting their clients’ assets, firms are also urged to make sure they’re extra vigilant in supervising staff, checking fees, expenses and transactions, looking out for investment fraud, monitoring their business continuity plans and protecting investors’ “sensitive information”. Subscribers to sister publication Regulatory Compliance Watch can read a full report here.


Slow and steady

Hillhouse Capital founder Lei Zhang believes PE firms are better aligned with society when taking a long-term approach to investing. Speaking on a digital panel hosted by investment non-profit FCLT Global on Tuesday, Zhang said investments have a more positive outcome when thought of in five-year, 10-year or 20-year horizons, noting: “Short-term people might be aligned for financial performance, but the long-term people may get much healthier, sustainable results for everybody.” Zhang said PE firms could use technology as a leveller in society during the coronavirus pandemic, citing an “exciting” opportunity to invest in traditional businesses that have been left behind by the digital revolution.

Dig deeper

Institution: Employees Retirement System of Texas
Headquarters: Austin, US
AUM: $28.30 billion
Allocation to alternatives: 30.0%

Employees Retirement System of Texas has confirmed $215 million-worth of private equity commitments to three vehicles, a contact at the pension informed Private Equity International.

The commitments comprise of $125 million to Balance Point Capital Partners V, $50 million to Industry Ventures Lonestar and $40 million to Industry Ventures Secondary Fund IX.

The $28.30 billion US public pension has a 13.0 percent target allocation to private equity that currently stands at 15.35 percent.

For more information on Employees Retirement System of Texas, as well as more than 5,900 other institutions, check out the PEI database.

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

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