Side Letter: Threats to PE’s democratisation; Wellington’s plans; Brookfield eyes growth

Proposals in the US could throw a spanner in the works for some retail investors wanting PE access. Plus: which managers' fundraises were affected the most by the pandemic and the allure of growth equity. Here's today's brief, for our valued subscribers only.

They said it

“The software sector will become a new infrastructure.”

Brookfield Asset Management chief executive Bruce Flatt told the firm’s annual investor meeting on Monday that mass digitisation and sticky cashflows will push the listed giant to include more growth in its PE strategy.

Just happened

Democratising PE?
Efforts to grow the reach of private equity could face a major setback, if a new proposal makes its way into law in the US. The policy proposal tabled last week by Democrats in the House of Representatives would prevent individual retirement accounts from investing in products offered to accredited investors, such as private equity and hedge funds, CNBC reported. The policy is designed to prevent the rich from using IRAs as a tax shelter and would force those who own such assets to divest them by the end of 2023 or lose their IRA’s tax-free status. It is not clear how many people this would affect.

The proposal does not appear to affect 401(k) plans, which are similar to IRAs but are employee rather than individually sponsored. The private equity industry enjoyed a significant breakthrough last year when the US Department of Labor ruled that 401(k) plans, which hold more than $7.5 trillion in assets, could incorporate certain private equity products without violating the law.

High-profile managers have been repositioning themselves to take advantage of the retail opportunity. In June, the global head of BlackRock Alternative Investors, Edwin Conway, said the firm was planning to grow the proportion of capital raised from private wealth clients to “25 percent or maybe even plus”, from around 10 percent today. BlackRock is seeking to raise at least $100 billion across its alternatives platform by 2023.

Wellington Management eyes more PE
We recently caught up with Manuel Kalbreier, director of alternatives for EMEA at investment management giant Wellington Management to discuss the firm’s near-term plans for PE. Top of his mind are growth capital, private debt and climate change-focused investments. A bit about Wellington: it manages $31.4 billion of alternatives assets, of which $4.5 billion, or roughly 14 percent, is in private equity. Consumer, technology, healthcare, financial services and biotechnology are focus sectors, and in December it held a $2.2 billion final close on its third late-stage fund, Wellington Hadley Harbor Partners III. Stay tuned for the full interview.

They did the math

Specialists vs generalists. The covid-19 crisis disrupted fundraising so much that at least one in five generalist PE firms in the US were forced to hold fundraising efforts entirely, according to a report from New York Life Investments Alternatives. That compares with only 3 percent of specialist firms. Generalist sponsors were also more likely than specialists to say the crisis had at least some negative impact on fundraising. Survey responses were gathered from more than 100 in-depth interviews with senior professionals at US mid-market PE firms between February and April 2021.

Essentials

Growing, growing, gone
Growth equity could soon be standing shoulder-to-shoulder with buyouts as GPs such as Brookfield Asset Management and LPs including Sacramento County Employees’ Retirement System carve out dedicated allocations. At its investor day on Monday, Brookfield indicated growth, particularly late-stage growth, would be a fundamental part of the firm’s PE strategy. The firm is imminently staffing up to facilitate the strategy “tilt”, according to chief executive Bruce Flatt.

For Sacramento County, it approved adding a 15 percent target growth-equity sub-allocation to complement the existing buyout, venture capital and distressed sub-strategies at its 15 September meeting, affiliate title Buyouts reported (registration or subscription required). Ten funds in the pension’s portfolio, including Accel-KKR Growth Capital Partners III, Spectrum Equity IX and Summit Partners Venture Capital V, were re-classified into the new bucket.

Growth equity fundraising hit a record level in H1 2021, with $32 billion raised in the first three months of the year alone, compared with $19.2 billion in Q1 2020 and $18.6 billion in Q1 2019, per PEI data. Whereas a typical LP historically had one or two growth managers and a portfolio of buyouts, over the past year that balance has shifted towards growth, according to Sarah Sandstrom, head of Campbell Lutyens’ North American private equity fund placement activities. The changing role of technology in our lives and the way covid-19 has accelerated those trends is a key reason for the shift, she added. Recent outperformance has also allowed mangers to return capital more quickly over the past year, putting to rest investor fears that growth investing means long holding periods.


Today’s letter was prepared by Alex Lynn with Adam LeRod JamesCarmela Mendoza and Michael Baruch.