Monitor

Private Capital Monitor 27/10

27th October 2023

WORTH A READ

United States

INELASTIC SUPPLY

Private equity investment professionals expect to see their total compensation increase 13% over last year, according to search firm Odyssey Search Partners. Despite the slump in dealmaking this year, these bankers’ bonuses are tied to steady and predictable management fees, making them less volatile than payouts in investment banking or hedge funds. Almost 50% of respondents to Odyssey’s survey already know what their bonus at year-end will be, through contractual guarantees or word from managers.

SIGN OF THE TIMES

Pensions & Investments’ Erin Arvelund writes about a new book which argues that historically strong returns from private equity will become a thing of the past. The book, written by Pulitzer-winning business reporter Gretchen Morgenson, questions the business model of private equity given rising interest rates and borrowing costs. Private equity generated alpha for a long time, writes Morgenson, but now is creating eventually bankrupt companies.

SLOW YOUR ROLL

Proposed guidelines for the Federal Trade Commission and Department of Justice threaten the efficacy of “roll-up” deals common in private equity, writes PitchBook News. The proposal states that “when a merger is part of a series of multiple acquisitions, the agencies may examine the whole series,” making it more difficult for these add-on deals (which are often in the same geography) to pass antitrust review.

Europe

HIDE YOUR PIGGY BANK

In Bloomberg, Miles Weiss reports private equity firms are targeting retirement savings, naming Fidelity and Charles Schwab as banks helping KKR raise funds for its new infrastructure projects. Weiss argues that despite these firms being well-known for serving individual investors, the money from these traditional sources is becoming scarce and notes individual investors represent a vast and largely untapped source of wealth. David Himmelreich, a senior vice president at Wealth Enhancement Group, emphasises the significance of the money held in individual retirement accounts, stating that it’s the largest pool of liquid capital in the world and is becoming increasingly important to private equity firms.

ARGUMENTS IN THE ICT SUITE

Jemima Kelly, FT columnist offers a response to Venture Capitalist, Marc Andreessen’s ‘techno-optimist manifesto’, noting that many Silicon Valley “types” who have read Andreessen’s manifesto — the central argument of which is that ““there is no material problem …that cannot be solved with more technology” — seem not only to see nothing even mildly unusual about it, but to believe that it is actually a work of genius”. Kelly argues Andreessen’s “blind faith” in all technology is “dangerous” and “deeply self-interested”, concluding that “simply having more is not the answer to our gravest problems. It’s only the things that cannot scale that really can help: compassion, kindness, empathy and, yes, love.”

THE STEAM ROOM

In the Financial Times, Laura Noonan, Josephine Cumbo, and Arjun Neil Alim delve into the discussion surrounding the call for regulations and the issues associated with private equity valuations. This discussion comes in anticipation of the upcoming review by the Financial Conduct Authority (FCA), expected to start later this year. The trio observes that insiders have described a lack of transparency and poor methodology in certain segments of the market. They also point out that the FCA’s review itself “reflects a growing concern among global regulators regarding the potential for shocks in private assets, which reached a total value of $11.7 trillion last year, according to McKinsey consultants.” The articles report that whilst the outcome of the UK’s review is not likely to become clear until the middle of next year, regulators are privately saying they may act sooner on individual bad practices.

VISIT TO THE GRAVEYARD

Aswarth Damodaran, a finance professor at the Stern School of Business at New York University, shares his pessimistic perspective on the state of ESG in an article for the Financial Times. He asserts that ESG, which initially began as a measure of ethical behaviour, has now reached a “beyond redemption”. Damodaran points out that the initial argument that ESG could deliver higher returns with lower risk has been challenged, particularly following the Russian invasion of Ukraine.

WALL OF MONEY

KKR closes third tech growth fund at nearly $3bn

The fund will invest in growth technology companies across North America, Europe and Israel. NGT III, the successor to the firm’s NGT I and NGT II growth funds, will continue KKR’s strategy of supporting high-growth technology companies by providing equity capital and access to the firm’s global capabilities and network.

Norvestor defies mid-market fundraising squeeze with €1.5bn haul

Norvestor, a private equity firm focusing on mid-market buyouts in the Nordic region, close of its latest fund surpasses its €1.25bn target in a “frenzied” fundraising market. Norvestor said that Fund IX is almost double the size of its predecessor fund, which closed at €806m in 2021.

Pictet AM’s European direct lending fund hits €200m target at first close

Pictet Asset Management has announced the first close of its European direct lending strategy at its target of CHF189.4 (€200). Pictet European Direct Lending I is a newly launched Article 8 fund with a focus on lending to European lower mid-market private companies.

DEAL CHART

MEDIA OF THE WEEK

Simona Maellare, UBS global co-head of the Alternative Capital Group, says private equity today is “not a growth asset class.” She talks about the challenges facing the industry on Bloomberg’s “Money Undercover” with Lisa Abramowicz.

Watch the video here

MOVERS AND SHAKERS

• JPMorgan has promoted Carsten Woehrn, who was named co-head of M&A in Europe, the Middle East and Africa at JPMorgan earlier in October, alongside Haidee Lee as global heads of its strategic investor group M&A unit.
• Brookfield Asset Management, a global alternative asset manager with $850bn of AUM, has appointed Sir Ron Kalifa as Vice Chair and Head of Financial Infrastructure investments.
• Revolution Asset Management, a Sydney based private debt investor, has hired Prateek Joshi, a Sydney-based Vice President in Bank of America’s (BofA) asset backed securities division

FROM THE HORSE’S MOUTH

“In 1997 Brown’s speech at the Mansion House was part of a wider conflagration – deliberately setting alight sheafs of out-moded regulation and legislation. This time around, there were fewer pyrotechnics from Hunt, but the slow burn may prove no less effective in creating genuine reform that has broad-based political and financial sector support. In the world of private capital we certainly hope so.” – Michael Moore, Director General of the British Private Equity and Venture Capital Association.

“The amount of money that is in IRAs is the largest pool of liquid capital on Earth….It is getting more and more important [to private equity firms].” – David Himmelreich, a senior vice president at Wealth Enhancement Group.

“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” – Theodore Roosevelt, born on this day, 1858.