In This Issue:
– CalPERS’ Annual Returns for Co-Investments and Directs Soar
– PE Returns Beat Other Assets, but Complexity Grows
– With RMB Funds Stripped Out, Annual Asian Fundraising Rises
– Loosening Debt Terms Favor PE Returns
– Private Equity’s “Online Courtship” is Just Beginning
– Carlyle Declares Energy the Most Attractive PE Investment Sector
– TPG’s Bonderman and Carlyle’s Rubenstein Discuss Private Equity
– One Journalist’s Burden: Living a Week Without PE-owned Products
CO-INVESTMENT AND DIRECT INVESTMENT GENERATE THE BEST PE RETURNS FOR CALPERS, according to the huge pension fund’s latest private equity quarterly report. The California Public Employees’ Retirement System’s co-investments and direct investments returned a stunning 50.5 percent in the year through September 30, more than any other PE investment structure, including traditional funds, funds-of-funds and secondaries. But with $31.3 billion committed to private equity, only 3 percent of CalPERS’ PE portfolio is invested in these low-cost alternatives, reinforcing the notion that co-investments and direct investments do well when chosen with extreme selectivity. Co-investments and directs out-performed all other structures over three years and ten years, but came in last over five years, posting a negative 1 percent return. The greater volatility in this portion of CalPERS’ portfolio, like the relative outperformance, is probably linked to its concentrated nature. Over the past year, CalPERS’ PE portfolio returned 19.1 percent. The report contains a wealth of statistical detail on both CalPERS’ PE portfolio and industry-wide trends.
CALPERS QUARTERLY REPORT
“IT’S HARDER THAN EVER TO NEGOTIATE THE COMPLEXITIES” OF PRIVATE EQUITY, despite evidence from two recent reports – one from the Private Equity Growth Capital Council and the other from the Defined Contribution Institutional Investment Association – demonstrating that PE outperforms stocks, bonds, property, hedge funds and real assets. In a Forbes magazine column, “Rethinking Private Equity,” which has links to the two studies, Palico founder Antoine Drean writes that “diversity of investment choice – in terms of geography, specialization and investment structure – is making PE more attractive than it’s been in a long time. Yet increasing diversity means that many investors find choosing PE funds is more complicated. Their less than optimal response is that they are committing more money to fewer managers.” Drean lists some of the “tough questions” that he says investors and fund managers must address if they are to “avoid missing out on lucrative connections.”
ASIAN PE FUNDRAISING IS UP, IF YOU DON’T INCLUDE HARD-HIT CHINESE RENMINBI FUNDS, notes a Private Equity International story. The RMB sector, which saw assets grow from virtually nothing six years ago to more than a third of China’s private equity value at the end of last year, accounts for all of the drop in Asian fundraising this year. Non-RMB funds “targeting Asia have so far in 2013 raised $26.2 billion across 59 funds. Last year, fundraising totals excluding RMB funds reached $22.9 billion across 83 funds,” PEI writes. A drop in RMB fund popularity is hardly a surprise. A greater proportion of RMB funds, when compared with those denominated in other currencies, focus on pre-initial public offering strategies, where companies are purchased and then quickly listed on China’s mainland IPO market. That market has been frozen for the last year as more stringent listing requirements are considered by China’s regulators. The PEI data demonstrates China’s popularity, but supports the less positive global trend “of fewer fund managers raising larger amounts of capital.”
PRIVATE EQUITY INTERNATIONAL
HERE’S MORE EVIDENCE THAT DEBT INCREASINGLY COMES WITH TERMS THAT FAVOR PE, but not necessarily lenders. “The amount of riskier loans offering fewer protections to lenders contained in packages of debt sold to investors have hit record levels, amid resurgent lending markets and a continued thirst for higher returns,” writes the Financial Times. Managers of collateralized loan obligations, which buy up corporate loans” and which are a key financing mechanism for private equity transactions, “have increased the proportion of riskier loans that their investment vehicles are allowed to buy to the highest levels on record.” “A 50 percent cap has become the industry standard in 2013” for these so-called covenant-lite loans versus “30-40 percent” in 2011. Overall, “55 percent of new leveraged loans come in ‘cov-lite‘ form eclipsing the 29 percent reached at the height of the leveraged buyout boom.” Cov-lite financing reduces corporate defaults, and thereby bolsters PE returns, but “market participants have debated for years” how risky these loans are for lenders.
THE NEW YORK TIMES DEALBOOK DOCUMENTS “PRIVATE EQUITY’S ONLINE COURTSHIP” in a story that points out how platforms like Palico complement the recent lifting of the 80-year-old ban on advertising by private equity funds in the U.S. With the relaxing of the ban, “private equity funds can let the public know they are looking for money, though they are still allowed to accept money only from those who are financially suited for such alternative investments.” The “sites vet investors to make sure they are ‘accredited’ ” for alternatives. The story notes that while a number of online private equity fundraising projects are in the works, only Palico is fully operational, with “about 1,300 members.” “Big sovereign wealth funds and pension funds use” Palico “to find private equity opportunities they might have otherwise overlooked,” the NYT DealBook writes.
CARLYLE SAYS ENERGY IS THE “MOST ATTRACTIVE INVESTMENT AREA GLOBALLY,” reports Bloomberg, observing that the private equity mega-firm “plans to raise $7 billion for energy funds in the next two years. Almost $100 billion has been raised for resource investments in the past six years, with cash raised annually for oil and mining funds already at a decade high of $24 billion in 2013. In the oil business, “processes such as hydraulic fracturing, or fracking, will require $1 trillion in new investment by 2020 to meet demand,” Ken Hersh, a Carlyle operating executive, said in a presentation at Carlyle’s annual investor day in New York. “Fracking ‘has transformed the paradigm around natural resources from one of scarcity to a world of abundance,’ Hersh said. ‘The challenge is now about capital discipline and investing because the industry needs to invest more than its free cash flow.’ ” As PE money continues to flow to the oil sector, pricing for assets may increase significantly.
PRIVATE EQUITY’S “TWO DAVIDS” DISCUSS MANY OF TODAY’S PE INVESTING CHALLENGES in this 36-minute video from the online library of the 2013 New York Times DealBook Conference. David Bonderman and David Rubenstein, respectively the founders of pioneering general partners TPG Capital and Carlyle Group, discuss everything from the appeal of publicly listing PE firms to outlooks for China, Europe and biotech. Some highlights: Rubenstein says Europe is attractive in part because “values for corporate assets are roughly 28 percent lower than what they are for comparable assets in the U.S.,” while Bonderman, an Asia bull, says that China, as well as “most places in Southeast Asia,” are “oversold.” Both industry veterans also believe that successfully deploying the classic PE buyout model, where general partners invest for control, is “not as easy as it used to be” and that going forward PE firms will make many more minority investments.
The New York Times DealBook
SPENDING A WEEK WITHOUT PRODUCTS OWNED BY PE IS VERY HARD WORK. After spending “an entire week avoiding products or services that are owned by private equity,” Wall Street Journal reporter Becky Pritchard says, “I’ve come to understand just how entwined in all our lives private equity is.” “I’ve had to give up TV, Twitter, going to the movies, Pret sandwiches, my favorite mascara and all my best clothes.” Pritchard couldn’t even go into the office, since the building where she works is partially owned by Blackstone. The number one lesson Pritchard learned during her week of privation: “PE is not just about high finance, it’s about businesses, employment and stuff that people use everyday. It’s real, it’s tangible and that’s why it matters.” She adds, “One week of living without PE is quite enough for any girl. I’m looking forward to getting my life back to normal.”
THE WALL STREET JOURNAL