“It’s a form of frustration we always have that, as LPs, you can’t control who’s in the market,” Steve Moseley, head of private equity at Alaska Permanent Fund Corporation, tells Private Equity International.
The state-owned US fund has found a novel solution to this problem; it has teamed up with UK private pension RPMI Railpen and Public Institution for Social Security of Kuwait to launch Capital Constellation, a $700 million joint venture that will provide cornerstone fund commitments and scaling advice for emerging managers. APFC and Railpen each committed $200 million, with PIFSS contributing the rest, according to Russell Valdez, founding board member of Constellation and senior managing director of investment advisor Wafra, which is owned by PIFSS and manages the joint venture.
Capital Constellation provides substantial commitments in exchange for revenue-sharing arrangements with the new firm, Valdez says. The arrangements take the form of passive minority economic participations that can be held indefinitely or exited as desired.
Alaska is no stranger to revenue-sharing arrangements; it is one of the largest participants in funds that take ownership stakes in general partners, having committed $550 million to the $5.3 billion Dyal Capital Partners III and $500 million to the $3.3 billion Blackstone Strategic Capital Holdings. PEI understands that both commitments were accompanied by revenue-sharing arrangements with the managers in question, although exact details are unknown.
“[The joint venture is] especially relevant at this moment in time when the private equity world is entering a second generation, where the largest firms have founders that are in some cases more and more detached from the investment activity,” says Daniel Adamson, Constellation president and managing director of Wafra. “The next generation of managers is looking for ways to securely and confidently put their talents to work in their own structures.”
Capital Constellation will seek to form a diversified portfolio of 10-12 managers over the next five years, Adamson says. It is expected to deploy over $1.5 billion via fund commitments during this time, according to a statement from the joint venture.
Capital Constellation made its first commitment to an emerging fund in December, providing $100 million for the debut from former Carlyle Group partner Mark Johnson’s Washington DC-based Astra Capital Management. The firm – which launched in 2014 – held a first close on $138 million upon receipt of the commitment, according to a Securities and Exchange Commission filing.
“We are very careful and have the luxury to be able to screen out the vast majority of first-time funds that are seeking capital,” Adamson says.
“We’re finding managers who are emerging from the household-name private equity firms with attributable track record and terrific teams who withstand intense due diligence. Because of our selectivity, this is not a venture approach in the sense of expecting to have a small percentage of our managers succeed.”
Sharing the load
The joint venture is not your ordinary fund or separately managed account. Unlike a GP, where the founders own the new firm and then launch funds, Capital Constellation is more akin to a corporate structure owned equally by the three investors. Wafra has discretion to select managers, while the owners guide the platform’s broader strategic direction via a governance board, Paul Bishop, investment director at Railpen, notes.
“You wouldn’t want us to have to make a decision together in a short period of time,” Alaska’s Moseley adds. “It’s hard enough to get different continents on the phone together at the same time, so there’s a dedicated and experienced team that will make those decisions on the ground.”
Wafra’s team of more than 150 is paid on a “shared expenses” basis with appropriate management incentives rather than on a fee-based arrangement, Adamson says, declining to go into further detail.
The structure provides the flexibility for longer-term capital deployment than a traditional fund commitment, he adds. “Unlike a fund we don’t come into these investments with any exit strategy in mind. Instead, because our structure has the potential to be permanent, we can take a generational view if we’re performing well and the founding partners choose to continue the programme.”
Adamson does not rule out new additions to the joint venture. “If we find kindred spirits in different regions who are keenly interested in the next generation of private equity managers, we may decide to expand our partnership.”