Side Letter: Trade war threat to China GPs, Naqvi record bail, tale of tail-ends

The Sino-US trade war is making it harder for China's emerging managers to raise capital, while blue-chip managers such as Warburg Pincus and CVC plough ahead. Here’s the brief, for our valued subscribers only.

Just happened

China’s growing pains

China’s emerging fund managers are struggling to raise capital due to US trade tensions, James Donnan (pictured, centre), managing director of fund administrator Intertrust, told delegates at the HKVCA China Private Equity Summit 2019 in Hong Kong on Thursday. The firm has seen a decline in the number of funds coming to market since December as managers await a potential deal between the sparring nations. Those who do launch funds are taking longer to reach final close as LPs opt to commit to larger brand-name managers who are considered a safer bet – welcome news to the likes of Warburg Pincus and CVC who are both in market with Asia funds.

Naqvi posts bail

Abraaj Group founder Arif Naqvi is out of a British prison, having paid a security of £15 million ($19 million; €17 million) for his release, according to a statement from his PR firm. Naqvi had been in custody at HM Prison Wandsworth since his arrest at the start of April and took more than a month to gather the funds, a UK record amount.

“He maintains his innocence, and he fully expects to be cleared of any charges,” the statement reads. “Mr Naqvi has repeatedly stated his commitment to be a positive force in resolving this situation for all stakeholders.”

Sell those tail-ends!

LPs holding fund positions older than 10 years and expecting the remaining value to be eventually returned should think again. Research by Upwelling Capital – an advisory firm founded by CalPERS PE veteran Joncarlo Mark – found that selling tail-end stakes at a double-digit discount on the secondaries market and reinvesting the capital can deliver better outcomes for LPs. “You have idle capital that is not even generating risk-free returns,” Mark tells us. With almost half of funds taking longer than 15 years to wind down, LPs need a systematic plan to address tail-end drag.

Essentials

FOMO hits LPs. LPs don’t like to miss opportunities to invest with their preferred managers: despite being over-allocated to PE, Employees Retirement System of Texas and Teachers’ Retirement System of Louisiana have both increased their investment allocations for fiscal 2019 to make room for attractive funds. LPs are under pressure to commit to funds from highly sought after managers early in a fundraise; the median time to close private equity funds in 2018 was just 12.5 months, the shortest since the global financial crisis, according to PitchBook.

Korean connections. South Korean manager Hahn is racing toward a $2.5 billion final close on its third fund. The firm has already raised $2.1 billion, a good chunk of which comes from US public pensions. The South Korean private equity market has been on the up: now the third largest PE market in Asia, more than $70 billion has been put to work in the country between 2010-17, and PE funds have posted an average internal rate of return of more than 20 percent, per a McKinsey & Company report.

WSI-Bye. Gary Bruebaker is set to retire by the end of the year after 18 years as chief investment officer at Washington State Investment Board. The $128 billion WSIB, which has a 23 percent target private equity allocation, will launch an industry-wide search for his successor in mid-2019, and Bruebaker will remain available through early 2020 to help with the transition. WSIB, which has a hybrid defined benefit and defined contribution pension plan, has been working to include alternatives in its DC target-date fund.

Dig deeper

Pennsylvania Public School Employees’ Retirement System has approved $425 million of commitments, including $200 million to Bain Capital Distressed & Special Situations 2019. Here’s a breakdown of the $55.27 billion pension plan’s investment portfolio. For more information on PSERS, as well as more than 6,700 other institutions, check out the PEI database.

He said it

“It raises the question of why money cannot be raised in a normal way.”

Pomona Capital founder Michael Granoff shares his scepticism on stapled secondaries deals.


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Today’s letter was prepared by Adam LeIsobel MarkhamRod JamesAlex Lynn and Preeti Singh.


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