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 In a low interest rate world, big investors with expanding pools of
money are increasingly turning to alternative assets for returns.
For private equity managers, the money mountain has created a $163
billion headache. That's the difference between the amount of money
funds raised worldwide last year and the amount they actually spent
in buyouts, according to market research firm Preqin - up from $134
billion in 2013.
The figure is set to be higher for this year and managers' dilemma
looks likely to intensify. In Europe alone in 2016, major outfits
including Apax, BC Partners, Charterhouse, Cinven and Permira will
all be raising funds. Just those five are seeking around $30
billion, according to Reuters calculations.
Industry figures say firms will have to get creative in order to
deploy their cash, going beyond the traditional majority buyout
format.
"The new funds currently being raised are going to be significantly
more flexible," said Rob Pulford, head of EMEA financial sponsors at
Goldman Sachs.
"They'll be looking at public equities, minority investments, and
different sectors and geographies."
TPG and KKR, among others, have taken their first steps into Africa
this year and last year, with a $1 billion investment plan and the
purchase of an Ethiopian rose farm respectively.
But the shift is deeper than pinpointing new areas on a map.
This month CVC invested 2.2 billion euros ($2.4 bln) in British
roadside recovery group RAC, the first investment by its Strategic
Opportunities fund.
The $4.5 billion pool has fewer than 10 investors, allowing its
limited partners (LPs) to spend large chunks at a time. It has a
longer life to enable it to hold assets for eight years plus,
against the usual three to five years - but it also has a lower
return profile. U.S. giant Carlyle is raising a similar fund.
It's a sign of the times. With interest rates low and cash piles
high, investors, or LPs, are having to sacrifice return expectations
just to get money out the door.
Pension fund assets alone are forecast to reach $56.6 trillion by
2020, from $37.1 trillion in 2013, according to figures from PwC
this year, and they need somewhere to put it.
That kind of demand, combined with low interest rates, meant U.S.
buyout house Advent felt able to scrap its preferred return, or
hurdle rate, on its current $12 billion fundraising. That rate --
traditionally around 7-8 percent -- means general partners (GPs)
must generate a certain amount of return before they begin paying
themselves the profits.
Advent declined to comment.
"Post the global financial crisis, institutional investors have
scaled back their return expectations," said Alexander Apponyi,
European Head of Jefferies' Private Capital Group.
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"Private equity, even with lower returns -- maybe the high teens --
is still by far the strongest producing asset class."
A survey by independent fundraising adviser Rede Partners found that
top private equity managers investing today are expected to post an
internal rate of return of 17.4 percent -- less than the pre-crisis
20 percent threshold, but far better than the 0.8 percent decline in
the S&P 500 this year.
EVOLUTION
Large investors are also looking to be more efficient by writing
bigger cheques to fewer funds, meaning allocations to the top funds
are ever more competitive.
The top 15 GPs alone -- the likes of Blackstone, Apollo and CVC --
had an estimated $130.1 billion in undrawn capital at the beginning
of this month, or 28.6 percent of the global total, according to
Pitchbook data from JP Morgan.
But it's not just a case of flinging cash after funds. Increasingly
sophisticated investors are asking for more bang for their buck.
"In a mature market, investors are looking to concentrate down to
about 60 GP relationships with larger commitments," said Mounir Guen,
Chief Executive of MVision Private Equity Advisers.
"They may ask for some form of recognition in terms of the weight of
that money, in management fees or carry."
The biggest GPs -- those that can put down $100 million or more
without blinking -- are even asking for accounts with investment
mandates tailored specifically to them. That can give them more
control over which assets their money is put into, varying lock-in
periods and more favorable fees.
"Segregated mandates are the biggest growth area in private equity
today," said Russ Steenberg, global head of BlackRock's Private
Equity Solutions group. "It's surprising it's taken this long to
evolve."
(Reporting By Freya Berry; Editing by Susan Fenton)
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