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Highlights:

– PE Firms Overcome “GP Merger Stigma”
– The UK’s 89 Pension Schemes Merge into Eight British Wealth Funds
– Benefits of Crossing the “15 Percent Frontier” of PE Allocation
– Flat Overall Returns for Foundations Mean More PE Investment
– China Drags Down Emerging Markets Investment
– PE KeyTrends Quick Question Results



PE FIRMS OVERCOME “GP MERGER STIGMA.”
As Real Deals notes “there are few people in the world who love a deal quite as much as general partners – except when it comes to conducting mergers and acquisitions between themselves.” Ego, backed up by the conviction that what sets them apart is what gives them an edge, means there’s always been a stigma attached to M&A between private equity managers. But that’s changing. “As PE has matured…the costs for marketing, compliance and investor relations have increased,” making it tougher to compete and attract talent, while increasing the appeal of multi-strategy platforms and economies of scale. Moreover, M&A permits “PE firms to expand geographically in a globalizing marketplace at a much faster pace.” The recent merger between L Capital and Catterton is an example. Both invest in luxury consumer goods, the former in Europe and Asia, the latter in North and South America. The negative knee-jerk reaction to GP mergers is steadily dissipating, thanks to prominent deals done from positions of strength.

REAL DEALS



THE UK’s 89 PENSION SCHEMES MERGE INTO EIGHT
British Wealth Funds. As Financial News reports, “they aim to be smarter managers of £214 billion in pension savings.” The move is arguably the most far reaching example yet of greater cooperation among limited partners. While the consolidation affects all investments, many believe it will have the biggest impact in private equity. Greater firepower will allow the schemes to more adequately cover an increasingly diverse universe of PE strategies, while permitting them to negotiate better fees and terms with fund managers. It will also provide sufficient resources to co-invest and even to invest directly – bypassing managers altogether. The conviction among investors that cooperation with their peers will be an increasingly important tool for broadening resources and improving returns also emerges as a striking theme in Palico’s two most recent biannual surveys of limited partners and general partners.

FINANCIAL NEWS
PALICO DATA SNAPSHOT



THE BENEFIT OF CROSSING THE “15 PERCENT FRONTIER”
of PE allocation is outlined in a Cambridge Associates study of 174 endowments and foundations, segmented by the amount of overall investment portfolio devoted to private equity. The study shows that “outperformance by investors with high PE allocations is persistent and remarkably consistent.” Driving it is “outperformance of private versus public equity.” PE portfolios “outperformed the Russell 3000 Index in 12 out of 20 years, and underperformance in the other eight years was relatively modest compared with the sizable margin of outperformance in the other years.” Cambridge posits that other factors contributing to the better returns of investors who crossed the 15 percent frontier are a longer-term overall investment horizon across all asset classes, and more staff resources than institutions with smaller private equity allocations. Over the full period studied in the report, the median return for investors with over 15 percent allocated to PE beat the median for those with under 5 percent “by a cumulative margin of 182 percentage points.”

CAMBRIDGE ASSOCIATES



FLAT RETURNS IN 2015 MEANS MORE PE INVESTMENT,
says Commonfund, assessing the implications of its annual survey of 228 foundations in Fundfire. Last year “marks the second straight year” that foundations fell below their overall annual return expectations of between 7.5 percent and 8 percent. To make up for the shortfall and meet liabilities, Bill Jarvis, executive director of Commonfund, says foundations will “have to use active managers, specifically managers in alternative strategies such as venture capital, private equity and real estate.” Last year “private foundations managed to stay out of overall negative territory, driven largely by PE, which returned 8.8 percent” on average. PE’s subset, venture capital, returned a particularly impressive average of 16.7 percent.

FUNDFIRE



CHINA DRAGS DOWN EMERGING MARKETS INVESTMENT,
reports WSJ Pro PE, citing data from the Emerging Markets Private Equity Association. Emerging markets private equity funds “raised $15.1 billion and invested $13.3 billion in the first half of the year, respective declines of 33 percent and 20 percent compared with the same period in 2015. But excluding China, capital invested in emerging markets actually rose 16 percent year-over-year to $10 billion. Private equity investment fell 59 percent in China to $3.2 billion, as the economy slowed and the country’s currency lost ground. The biggest investment gain was in Southeast Asia, where $1.9 billion was plowed into PE purchases, 47 percent more than in the first half of 2015.

WSJ PRO PRIVATE EQUITY
Media 5-2


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

  • 69 percent of respondents believe LP direct investment is likely to be a major competitive challenge for GPs in 5 years.
  • 62 percent of responding LPs say they are increasing investment in separate accounts at the expense of classic fund structures.
  • 53 percent of respondents think a significant increase in initial public offerings for venture capital-backed tech companies is imminent.



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