[ U P D AT E ]
Private equity
near tipping
point despite
record interest
WHILE PRIVATE EQUITY MAN-
AGERS APPEAR TO BE RAISING
RECORD AMOUNTS OF MONEY,
THERE ARE A NUMBER OF
POSSIBILITIES ON THE HORI-
ZON THAT COULD WIPE AWAY
GAINS.
I
n the golden age of hedge fund investing,
it was not unusual for managers at full
capacity to turn away surplus money. That
was until the industry was spectacularly
blindsided by the financial crisis. Today,
private equity managers are currently
wearing that cloak of invincibility, raising
money with extraordinary ease. Confidence
is certainly brewing at Super Return CFO/
COO Amsterdam, a smaller sister conference
to its flagship Berlin event, but the industry
is conscious that the good times may not
last forever.
At full capacity
Earlier in the year, it was reported that
institutions were literally pleading to access
the latest fund being launched by CVC, the
private equity company which acquired For-
mula One and recently tried to take over the
English domestic rugby premiership league.
While quite shocking, the events at CVC
14
Global Custodian
Fall 2018
are not isolated incidents, according to LPs.
“Getting in front of some GPs is very diffi-
cult,” explains one allocator. “It is hard to get
in front of a manager who is launching a $1
billion fund when you are only investing $10
million,” he says.
But will it last?
While private equity performance has been
strong, the superfluity of dry powder, insane
valuations, excessive debt and the growing
risk of an interest rate rise, all have the po-
tential to wipe away gains. Some investors
say the lack of engagement could come
back to haunt managers if markets sour and
private equity begins to struggle. Rumblings
of disquiet are becoming louder, not helped
by a recent study (heavily disputed by the
industry), courtesy of Oxford Said Business
School, which said the US private equity in-
dustry failed on average to beat an S&P 500
tracker fund yet has extracted $400 billion
in fees since 2006.
Better transparency is needed
While negotiating a meeting with some GPs
is challenging, obtaining reports – certainly
on the industry’s famously complicated
fee breakdowns – can be even harder. A
perfectly well-intentioned initiative by ILPA
(Institutional Limited Partners Association)
to standardise private equity fee reporting
is underway but manager adoption rates
are pitifully low. A rare minority of investors
are taking a stand and blacklisting man-
agers who refuse to disclose their fees in
ILPA’s template, according to one speaker,
but most LPs are not putting their heads
above the parapet, at least while returns are
strong.
Brexit: Time to plan
GPs generally agree that while Brexit has led
to a marginal fundraising slowdown at some
of the smaller UK private equity firms, the
industry is still investing in UK companies.
While it appears Luxembourg has seen the
most re-domiciliation activity among private
equity, a lot of managers are holding off
moving operations. Experts at Super Return
CFO/COO said very few UK private equity
houses passport to all 27 EU markets, so will
instead rely on the existing national private
placement regimes (NPPR) when distrib-
uting on the continent. As such, very few
expect much to change post-Brexit.