Just happened

Triton’s return
European mid-market firm Triton Partners is back in market with its latest flagship, Side Letter has learned. Triton VI is seeking €5.5 billion, according to a source with knowledge of the fundraise. Fund VI’s target is nearly 40 percent larger than that of its predecessor. The 2018-vintage Triton V gathered €5.2 billion against a €4 billion target after nine months in market. The firm’s previous flagship funds combined are understood to have delivered a 3.1x gross MOIC and 28 percent gross IRR to date. The firm declined to comment to Side Letter.

Fund VI is expect to follow the “fix and expand” strategy adopted by Triton’s previous mid-market funds. It will pursue businesses in western Europe that face challenges like excess leverage, operational issues and balance sheet restructuring. Target sectors are understood to include industrial tech, healthcare, business services and consumer, with typical equity investments likely to sit in the €200 million to €500 million range.

Though Triton’s timing may not seem ideal from a broader fundraising standpoint, a combination of interest rate hikes, inflation and an uncertain macroeconomic outlook could well make for a compelling set of deal targets in need of ‘fixing’ over the medium-term.

Sector-specialist superiority
Sector specialists are often quick to suggest that their laser focus on a single area of expertise delivers better returns than generalists. An index out this week appears to support their claims: Paris-headquartered Mantra Investment Partners’ Niche Private Equity Index, which focuses on the performance of highly specialised investment strategies, tracks average returns on a rolling 10-year basis and is updated quarterly.

The latest complete data set – through June 2022 for funds that are at least three years old – has found that annual returns from niche PE strategies outperform their mainstream counterparts by a factor of two over periods of 10, five and three years. Focused strategies have generated an average annual return of 42 percent over 10 years, versus 21 percent for overall PE. Niche PE also outperforms generalised PE in multiples of invested capital, though far more modestly (2.1x versus 1.8x). This, the firm said, is due to the shorter holding periods that typify specialised investments.

Niche or highly specialised portfolio companies may be only understood by a few managers, and buying in at relatively attractive purchase prices can lead to higher sales and earnings growth on average, said Antoine Dréan, founding partner of Mantra. “Faster growth typically means niche PE companies get sold faster and investors can reinvest more rapidly, making up for any relative reduction in outperformance based on multiple of invested capital,” he added.

Correction:
Yesterday’s Side Letter incorrectly noted that LLR Partners was set to hold the final close on its seventh flagship fund this month. Fund VII will instead hold its first close. We apologise for the error.

Essentials

Brookfield’s secondaries play
Brookfield Asset Management‘s secondaries tie up with DWS may – as our colleagues at Secondaries Investor noted last month (registration required) – represent a niche bet, but that hasn’t dampened the firm’s aspirations for the new unit. BAM president Connor Teskey told analysts on Wednesday that the firm has ambitions to be a leader in secondaries.

“Brookfield’s access to capital and its ability to think of unique and flexible transaction structures to benefit its counterparties can be additive,” Teskey said. “And given our deep knowledge of a lot of the segments where the secondaries opportunities sit, we often have knowledge of the underlying assets or underlying companies that are subject to these trades.”

Teskey said BAM eventually hopes to offer all types of secondaries products, though it will focus on GP-initiated transactions to start. Read more about its plans to build out the unit here.

Also of note: BAM expects to return this year with its second Global Transition fund, having only held the final close on $15 billion for its debut vehicle last June. Teskey told analysts the “opportunity” for the sophomore vehicle will be “meaningfully larger than the initial fund”. “There is no question and that would certainly be our ambition,” he said.

BAM raised $93 billion of capital across strategies in 2022 and ended the year with $790 billion in total AUM, up 15 percent from 2021.

Speaking of secondaries…

There may be an abundance of secondaries deal opportunities, but there’s a significant lack of enough capital to back those deals, according to a survey shared with Side Letter by investment bank Raymond James this morning. Secondaries buyers have around $120 billion in dry powder – a roughly 20 percent drop from this time last year. “The secondaries market’s biggest short-term constraint is available capital,” the adviser noted in its 2023 Secondaries Outlook Survey.

A bright spot on the horizon: several secondaries fund closes are expected this year, adding to the amount of capital for deals, Raymond James noted. According to data from affiliate title Secondaries Investor, Ardian, AlpInvest Partners, Coller Capital, HarbourVest Partners and Lexington Partners are all in market seeking more than $10 billion each for their respective secondaries strategies.

Net-zero necessities
GPs wanting commitments from members of the Net Zero Asset Owner Alliance – which collectively wield $11 trillion in assets under management – better get serious on net zero, our colleagues at New Private Markets report (registration required). After 2026, GPs will need to align their funds with net-zero pathways – including implementing “strict net-zero requirements” in the underlying assets. This comes as part of new reporting and target-setting requirements for PE, infrastructure and real estate equity investments set last week.

Targets must be formulated using science-based decarbonisation pathways aligned with a 1.5C temperature rise cap by 2050. Members should “strive for” carbon reduction targets in the range of “-22 percent to -32 percent by 2025, and -40 percent to -60 percent by 2030”, the protocol states. Members should also engage with the managers of their existing private fund investments to implement decarbonisation targets in the underlying assets.

Claudia Bolli, head of responsible investing at Swiss Re, was among those who worked on the protocol. She told NPM these target-setting and engagement requirements can be challenging, especially for small Alliance members, as asset owners are often already short of due diligence and deployment resources. For that reason, companies with transition plans already in place would be “more interesting for me”, Bolli said. Having transition plans in place will soon become a “standard requirement” rather than “a nice to have” for companies or GPs seeking to raise capital, and “GPs will be ultimately required to [include transition plans in business models] to stay attractive for the ones who have the money”.

Dig deeper

Name: Oregon State Treasury
Headquarters: Salem, US
AUM: $91.9 billion
Allocation to private equity: 26.6%

Oregon State Treasury has committed $150 million to venture capital funds EnCap Flatrock Midstream Fund V and $50 million to EnCap Flatrock Midstream Fund V – Co-Investment.

The public pension’s recent private equity commitments have focused on venture capital, buyouts and debt in North America, Europe and Asia-Pacific.

The pension allocates 26.6 percent of its total assets to private equity investments, amounting to $24.44 billion.

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

Today’s letter was prepared by Alex Lynn with Carmela Mendoza, Adam Le, Helen de Beer and Madeleine Farman.