Side Letter: TPG’s LP fee share; Schroders’ climate LTAF; Kotak’s special situations close

TPG and Canada's AIMCo have an unusual multi-fund agreement. Plus: efforts to clear up the SEC's private funds marketing rule appear to have fallen flat; and the UK's first LTAF will be climate-focused. Here’s today's brief, for our valued subscribers only.

Just happened

AIMCo: receives a portion of the TPG fund pie (Source: Getty)

TPG AIMing to Co-share fees
Side Letter is the title of the publication you’re reading, and this morning we have an interesting side letter agreement to share with readers. TPG said in regulatory filings last week that it had raised $469.9 million for TPG GP Solutions, its debut GP-led secondaries fund. The vehicle, which officially launched in January last year, is seeking between $1.5 billion and $2 billion, our colleagues at Buyouts have previously reported. Side Letter now understands that Canada’s Alberta Investment Management Corporation has backed the fund and has worked out an agreement wherein it will receive an economic share of the GP’s management fee and carried interest.

The agreement applies to both TPG GP Solutions and its follow-up vintage, according to two sources familiar with the setup. It’s unclear how much of the management fee and GP carry AIMCo will receive and the pension did not return a request for comment. TPG declined to comment when contacted by Side Letter.

LPs participating in a share of a fund’s performance is of course not unusual – they receive 80 percent of profits pro rata, after all. What does appear to be unusual is an LP receiving a share of the GP’s economics and management fees. It’s unclear whether AIMCo’s arrangement is set up in the form of some kind of management fee offset or discount as an early backer of the fund. Even if this is the case, it would be uncommon: data from law firm Paul Weiss published in December found that 82 percent of funds do not provide so-called “early-bird” discounts on management fees. We’d love to hear from you if you know more about these types of fee-sharing arrangements.

Muddying the marketing waters
The SEC marketing rule, which has been causing confusion with fund managers since its introduction, continues to baffle even after its most recent FAQ, our colleagues at Private Funds CFO report (registration required). New guidance on the marketing rule was released in January that failed to advise on how to calculate net performance – particularly with regards to whether extracted performance would apply to a subset of investments in a single portfolio, a single asset or grouping of multiple investments from different portfolios.

In a March webinar hosted by FactSet, Julia Reyes, a partner at ACA Group, said January’s FAQ states that whether a fund manager shows a single investment in the form of a case study or within a narrative that highlights individual investments and their attributed performance over a period of time, the marketing rule considers it a presentation of extracted performance, and managers must provide a net performance number. Michael McGrath, a partner at Dechert, said many managers had assumed otherwise.

“Funds thought that a single investment wouldn’t be considered extracted performance, so the [marketing] rule wouldn’t apply. But when the FAQ was released in January, it addressed this specific issue and said the marketing rule does apply and net performance needs to be shown,” McGrath explained. Some firms are relying on the delta between net and gross performance to provide a net number; some are relying on their highest projected fee amounts; and others are relying on a more complex calculation involving deal-by-deal IRRs and pro rata expense allocations.

As with most SEC guidelines, a systematic approach is the best way for managers to tackle the marketing rule. Without clear direction from the SEC itself, this could be difficult.

More climate capital
The UK’s first ever Long Term Asset Fund will double down on climate investing, Schroders Capital disclosed at a London media roundtable yesterday. Schroders Capital Climate+ LTAF will comprise:

  • 40 percent to PE
  • 20 percent to infrastructure
  • 25 percent to real estate
  • 10 percent to natural capital
  • 5-20 percent in climate-related liquid holdings

The portfolio will target 8-10 percent net returns, with a 1.25 percent management fee and no carried interest or performance-related fees. Its founding investor is the UK master trust of fintech business Cushion, which offers workplace pensions and savings products.

Schroders Capital received approval from the FCA this month to launch its LTAF. The structure allows defined contribution pension plans and retail investors to “invest efficiently in long-term, illiquid assets” via an open-end vehicle. You can find more about the concept here.


Kotak’s close
Indian alternatives firm Kotak Investment Advisors has held a $1.25 billion first close on its Strategic Situations Fund II, per a Tuesday statement. The sector-neutral fund launched in January last year with a $1.6 billion target, and will be providing debt, equity and hybrid funding to value and growth enterprises. Fund II pooled commitments from global investors including sovereign wealth funds and pension funds.

The Gujarat-based GP is the investment arm of Kotak Mahindra Bank in Mumbai. In 2019, the firm’s debut Special Situations Fund closed on its $1 billion target after about seven months in market. “Riding on the success of the first Special Situations Fund, our investors have reposed faith in us by re-upping their large commitments in the second fund,” Eshwar Karra, chief executive of Kotak Special Situations Fund, said in the statement.

This latest fund close comes amid shrinking appetites for Chinese PE and diversification across the Asia-Pacific region, Private Equity International reported this week. As the second biggest market in the region, India in particular is expected to benefit from the shift away from China. Last year, China’s deal value share in Asia plunged to a nine-year low of 31 percent, while India’s share grew to 23 percent, according to Bain & Co’s Asia-Pacific Private Equity Report 2023.

Dig deeper

Name: Baltimore City Fire and Police Employees’ Retirement System
Headquarters: Baltimore, US
AUM: $3.1 billion
Allocation to private equity: 12.2%

Baltimore City Fire and Police Employees’ Retirement System has made commitments totalling $100 million towards two private equity vehicles, according to its February board meeting minutes.

The Baltimore-based public pension fund committed $70 million to Manulife Co-Investment Partners III and $30 million to BCFPERS Manulife Separate Account.

Manulife Investment Management launched Manulife Co-Investment Partners III in early 2023. The fund, like its predecessors, is expected to follow a co-investment strategy in making equity investments into diversified assets. Manulife’s separate account for BCFPERS also adheres to a co-investment strategy.

BCFPERS allocates 12.2 percent of its total investment portfolio to private equity, amounting to $378.24 million.

For more information on Baltimore City Fire and Police Employees’ Retirement System, as well as more than 5,900 other institutions, check out the PEI database.

Today’s letter was prepared by Alex Lynn with Adam LeHelen de Beer, Madeleine Farman and Katrina Lau.