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Highlights:

– 2016 is the Best Year Ever for PE Commitments
– More Evidence that Investors Are Boosting PE Exposure
– PE is Under Pressure at Pension Funds
– Trump Could Unwind Listed PE’s “Chronic Discount”
– First Round Capital’s Holiday Music Video
– PE KeyTrends Quick Question Results



2016 IS THE BEST YEAR EVER FOR PE COMMITMENTS,
reports The Triago Quarterly. Annual fundraising for classic 10-year funds is estimated at $493 billion, a post-financial crisis high, while commitments to ‘shadow capital’ – co-investments, direct investments and separate accounts – is pegged at an unprecedented $188 billion. The estimated $681 billion total in 2016 surpasses previous all-time highs of respectively $627 billion and $624 billion set in 2015 and 2008. But fundraising competition among managers “remains intense,” particularly for those trying to raise high margin classic funds. Low-margin co-investment and managed accounts, plus direct investment, which bypasses managers entirely, equals 28 percent of 2016 commitments, up a third in two years; and a Triago study of 100 investors shows that the average commitment to an individual PE fund, known as a ‘ticket’, has risen 47 percent in five years to $50 million, as investors “rationalize” and “commit more to fewer managers.”

THE TRIAGO QUARTERLY



MORE EVIDENCE THAT INVESTORS ARE BOOSTING THEIR PE EXPOSURE
can be found in Fidelity’s exhaustive annual survey of institutional investors. The poll of 933 institutions in 25 countries managing a total of $21 trillion, found that 72 percent plan to increase holdings in alternatives like private equity in 2017 and 2018. PE and other alternatives are seen as a means of achieving better returns in what many of the poll’s participants fear will be a global economy characterized by persistently low interest rates and public market volatility, notes Reuters’ coverage of the survey.

FIDELITY
REUTERS



DESPITE TOP RETURNS, PE IS UNDER PRESSURE AT PENSION FUNDS,
notes WSJ Pro in its coverage of a decrease in the private equity allocation at the California Public Employees’ Retirement System, the largest pension fund in the U.S. “CALPERS doesn’t have enough assets to match its projected obligations and its struggles encapsulate those of pensions,” writes WSJ Pro. The mismatch is a pressing issue as growing numbers of baby boomers – defined in the U.S. as those born between 1946 and 1964 – retire. CALPERS is cutting its interim PE allocation from 10 percent of its $301 billion in assets to 8 percent while it builds up its pool of “highly-liquid investments” to 4 percent from 1 percent and increases its exposure to a range of inflation hedges. Liability concerns like those at CALPERS should increasingly drive global pension fund investment towards specialist private equity strategies – for example, infrastructure and real estate – that combine the asset category’s traditional strength of long-term, activist-driven capital appreciation with yield.

WSJ PRO



TRUMP COULD UNWIND THE “CHRONIC DISCOUNT” OF LISTED PE FIRMS
if he carries out the tax reforms his campaign promised, proclaims Forbes. In a story heavily influenced by comments recently made by Leon Black, chairman and chief executive of publicly listed Apollo, Forbes says that lowering the U.S. corporate tax rate to 20 percent and cutting the top individual rate to 33 percent would make it attractive for listed private equity firms to forego a structure that helps them avoid double taxation, but which also saddles investors with complex filing obligations and keeps shares excluded from market indexes and sector groupings. Black noted this month that such a change would probably result in “a much broader investor base” for Apollo, “which would be good for the stock.” Adds Bill Miller IV, manager of the LMM Income Opportunity Fund, an investor in Apollo: “Private equity stocks are one of the cheapest parts of the entire market. All of them are worth roughly 50-to-100 percent more to where they are trading today.”

FORBES



FIRST ROUND CAPITAL PARODIES POP AND VENTURE CAPITAL AGAIN.
In the latest installment of their eagerly anticipated Happy Holidays music video, venture capital firm First Round Capital does its level best to poke fun at themselves, startups and top-of-the-charts pop music. Clocking in at seven-minutes plus, it features 2016 hits with vc-inspired lyric changes: In Meghan Trainor’s “Me Too”, we get “If I were you, I’d wanna fund me too” – rather than “I’d wanna be me too”; while Justin Timberlake’s “Can’t Stop the Feeling (so just dance, dance, dance)” becomes “just be a founder, take a chance, chance, chance…” First Round’s 2016 wrap already has over 62,000 views on YouTube.

FIRST ROUND CAPITAL


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

  • 54 percent of respondents say it’s easier to consistently invest in top quartile managers in private equity than in other asset categories.
  • 52 percent of respondents believe it’s likely that PE assets will equal some 10 percent of global financial assets in 10 years, up from just 1.5 percent today.
  • 50 percent of GP respondents plan to expand their offering of co-investments and separate accounts.