Warburg Pincus: fighting the mega-fund trend

The firm is expanding its business by doubling down on some of its sectors of expertise.

At first sight, Warburg Pincus appears conservative in a vibrant fundraising environment where mega-funds are shooting up in size.

Warburg Pincus Global Growth, which the New York-based firm plans to launch in May with a $13.5 billion target, is the same size as its predecessor and only 20 percent larger than Warburg Pincus Private Equity XI which closed in 2012, two funds earlier in that series. Compared with some of the largest fundraises of 2017, this looks restrained.

Apollo Investment Fund IX was 68 percent larger than Apollo Investment Fund VII, also two generations earlier, which closed in 2008. Clayton, Dubilier & Rice X, which closed on $9.4 billion in 2017, was nearly 90 percent bigger than its Fund VIII, which also closed in 2008.

This doesn’t tell the whole story. Warburg Pincus has expanded its reach by raising companion funds. In 2014, it raised a $4 billion energy-focused vehicle, much of which has yet to be invested thanks to the choppy environment in the sector in the last couple of years. In 2016, it raised $2 billion for a China-focused fund, and in December a $2.3 billion financial services fund.

If those vehicles are taken into account, Global Growth will be more than 85 percent larger than Fund XI, which is roughly in line with its peers.

These are not expansions into new territories; energy, financial services and China have all long been part of the firm’s investment thesis of global growth. Other sectors it favours include healthcare and consumer, industrial and business services, and TMT.

The firm, headed by co-chief executives Chip Kaye and Joseph Landry, raised the specialist funds because the areas were becoming bigger parts of the main fund and it wanted to avoid over-concentration.

“Warburg Pincus believes over the next several years there is an increased likelihood of dislocations in financial services in one or more of the geographic markets in which the firm has historically invested,” reads a private equity manager summary profile, part of a November fund presentation to the Minnesota State Board of Investment.

These companion funds are seen as safety valves to maintain diversification in the flagship fund, with every financial services – or energy – deal being split evenly between the specialist fund and the main fund.

Transparency

So Warburg Pincus may not be more conservative than its peers, but it is more transparent about the sectors it invests in and its exposure to them. It has also stayed focused on its core investing strategy – global growth – while offering new options to limited partners.

Warburg Pincus, which has $44 billion in assets under management, is the only firm in the PEI 300 ranking’s top five that hasn’t branched out into new strategies such as private debt or real estate.

And these specialist funds could also boost returns; a Cambridge Associates report in 2014 found they typically outperform generalist funds.