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Highlights:

– The Stars are Increasingly Aligned for PE-Backed Purchases
– PE is Set to Attract Record Commitments in 2015
– Venture Capitalists will Get the Best Returns in Europe
– PE is Increasing Investment in Hedge Fund Groups
– Carry is Justified by Returns, Particularly for Big LPs
– PE KeyTrends Quick Question Results



THE STARS ARE INCREASINGLY ALIGNED FOR PE-BACKED PURCHASES.
In the latest evidence of this, the Private Equity Growth Capital Council notes in their ‘Trends’ report that in the third quarter of 2015 the U.S. PE industry “switched its focus from portfolio exits to investing in new companies.” Quarterly “investment rose by a strong 15 percent to $154 billion, the second highest level since 2007.” Meanwhile, “after an explosion of exit volume” in Q2, “exits calmed to $69 billion” in Q3, a 32 percent fall. A PEI article on the report notes that is still “the highest level” for PE portfolio sales “in this period in the past decade.” Recently, Leon Black, founder of bellwether fund manager Apollo, declared that his group entered an “asset accumulation cycle” and was finished with the industry’s “excess distribution cycle,” which he famously heralded two years ago by saying he was “selling everything not nailed down” to take advantage of exceptionally high prices for acquisitions.

PRIVATE EQUITY GROWTH CAPITAL COUNCIL
PRIVATE EQUITY INTERNATIONAL



PRIVATE EQUITY WILL ATTRACT “RECORD” COMMITMENTS
in 2015 the New York Times writes, citing data from private equity fund advisory Triago. “PE funds took in $364 billion in the first three quarters of the year, and fundraising is on pace to reach $468 billion by year-end, the highest annual amount for traditional funds since 2008.” “Notable is the amount of money raised in a separate category – what Triago calls ‘shadow capital,’ – ” consisting of direct investment, co-investment and separate accounts. “So far this year $121 billion of investor funds” have been devoted to shadow capital. “Adding investments in traditional funds and shadow capital together, the PE market will attract a record $629 billion” in primary commitments. The Triago report forecasts that the secondary market for stakes in already closed PE funds will see record volume of $40 billion this year, “supported by the emergence of mega funds as buyers.”

NEW YORK TIMES
THE TRIAGO QUARTERLY



VENTURE CAPITALISTS WILL GET THE BEST RETURNS IN EUROPE,
implies Bloomberg. “For investors craving that old Silicon Valley standby, harvesting fast money from an initial public offering in technology, the place to look right now is Europe. With companies from Paris to London and Berlin raising record money, newly listed stocks” in 2015 “have rallied 20 percent in the month following their IPO, eclipsing the 6.7 percent gain in the U.S.” That’s largely explained by frothy private company valuations in the U.S. Unicorns, or private companies valued at $1 billion or more, that IPO’ed in the U.S. this year had an average value of 3.9 times estimated sales versus an average of 2.6 in Europe. Among the reasons for the high U.S. tech company valuations are mutual funds pumping money into “hot start-ups before they’re public” and “the advent of private share markets where insiders can sell stock.” European startup investors “have longer time horizons.”

BLOOMBERG



PE IS INCREASING INVESTMENTS IN HEDGE FUND GROUPS,
writes the Financial Times. PE fund managers are “turning to hedge funds as they seek to capitalize on the maturing industry’s rich fees.” Examples include Credit Suisse starting a private equity vehicle that “buys minority stakes in hedge fund management businesses” and Goldman Sachs which is “near to closing its second fund to do the same.” They will compete against Blackstone, Affiliated Managers Group, Neuberger Berman, KKR and Carlyle, “some of which have been buying such stakes for a decade.” For hedge funds, selling “sets a valuation, which helps motivate employees, and locks in more permanent capital, amid threats of client redemptions and…fee pressure.” In a hedge fund world where growth is difficult and many of “the industry’s pioneers [are] near retirement age, trading some profitability for a stable partner is often referred to as succession capital.”

FINANCIAL TIMES



PE’s CARRY IS JUSTIFIED BY RETURNS, PARTICULARLY FOR BIG LPs.
That would seem to be the key takeaway from giant pension fund Calpers’ disclosure of the amount it has paid private equity funds in carry. Carry is a share of investment gains, on average 20 percent, awarded fund managers after a preferred return of typically 8 percent has been returned to limited partners. Bloomberg reports “PE firms reaped $3.4 billion in profit sharing for investing on behalf of the California Public Employees’ Retirement System since 1990.” “Calpers invests 9.6 percent of its money in PE, or about $28.9 billion” and has netted $24.2 billion from PE over the past 25 years. That’s equal to an average annual return of 11 percent – the highest of any asset class it invests in. While carry paid by the pension fund amounts to some 12.3 percent of its gross returns, it should be kept in mind that Calpers’ size gives it leverage to negotiate lower carry fees than the industry’s standard 20 percent.

BLOOMBERG


AND NOW THE RESULTS OF SOME OF OUR RECENT KEYTRENDS QUICK QUESTIONS:

  • 81 percent of respondents believe Fidelity’s writedowns of venture-backed startups are just the beginning of a major slide in valuations for such companies.
  • 70 percent of respondents do not believe today’s historically high purchase price multiples will prove a relatively permanent feature of the private equity market.
  • 59 percent of respondents say that, on average, limited partners do not have adequate resources to successfully co-invest.