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Predictions Revisited

Private Equity International, Friday Letter on Dec 16, 2016

 
Predictions revisited 
 
At the end of last year we made five predictions for 2016; let’s see how we did… 
 
Those in the business of making predictions - particularly in politics - had a difficult year in 2016. A look back at the five forecasts we made at the close of 2015, however, suggests that the world of private equity has been slightly more stable. 

Our five prophecies were:

1. The mountain of dry powder will grow 

Verdict: it did


According to data compiled by placement agent Asante Capital, in June 2016 global dry powder stood at $1.4 trillion across all asset classes, up from around $1.3 trillion at the end of 2015. Industry giant Blackstone - which claimed the top spot in this year's PEI 300, with $60 billion raised in the last five years - now has $102 billion in uncalled capital, up from $85 million in 2015. It's been another tough year to invest, due to a combination of sky-high valuations, market volatility and uncertainty surrounding political events worldwide. Once again distributions to LPs were on track to exceed capital calls in 2016, with annualised distributions of $420 billion against calls of $288 billion, according to data from Triago at the end of Q2.

2. The LP base and GP product mix will keep evolving

Verdict: true, but it's a slow process


Private equity has continued to significantly outperform public markets this year, which is tempting more and more investors to double down on the asset class. According to the PEI Perspectives 2017 survey , three-quarters of investors are intending to increase or maintain their target allocation to private equity over the next 12 months.Asian insurance groups have begun flocking to the asset class following deregulation , while family offices are increasing their exposure. Co-investment, direct investment and separate accounts have all grown in popularity this year, while new fund structures, such as longer-term vehicles and those that can cater to defined contribution pension plans, have continued to grow and develop.

3. Fund terms won't be one-size-fits-all

Verdict: very much so


As we welcomed in the new year, a number of firms - most notably perhaps Advent International - were inviting LPs into funds with new twists to standard terms and conditions. While there clearly remains a standard set of headline fund terms embraced by the majority, those with the necessary track record have been able to adapt these. Notable examples include in-demand US manager Abry Partners, which increased the carried interest on its latest fund, Abry Heritage Partners, to 30 percent. Its previous funds had the industry standard 20 percent. Meanwhile, Chicago-based Thoma Bravo raised $7.6 billion for its latest fund without a hurdle rate; something that a select few firms can get away with.

4. Fees will remain in the spotlight

Verdict: they certainly did


A combination of Securities and Exchange Commission enforcement and scrutiny of public pension investment costs has ensured the issue of fees has remained front and centre. The California legislature passed a bill in October requiring public pension systems to obtain specific disclosures from their fund managers on fees and expenses and publish this data once a year. The California Public Employees' Retirement System, the California State Teachers' Retirement System and the Massachusetts Pension Reserves Investment Management Board all released data for the first time on how much carried interest they have been paying their external private equity managers. The SEC, meanwhile, brought some high-profile enforcement actions against firms on matters relating to fees and expenses. Notably, Blackstone agreed to pay around $39 million to settle a charge relating to fee practices.
 

5. Funds of funds will have a revival

Verdict: in a way


Funds of funds
 hogged much of the limelight in 2016 thanks to the hostile takeover bid launched by HarbourVest Partners for SVG Capital. After more than a month of back-and-forth, which included several counterbids from other heavy-hitters, SVG capitulated to HarbourVest's final offer of £806 million ($1 billion; €963 million) , sealing a deal which industry insiders said could fundamentally change the dynamics of the secondaries market . The fund used to launch the bid, Dover IX, smashed its $3.6 billion target to close on $4.8 billion . Meanwhile industry peer Hamilton Lane closed its largest-ever private equity fund of funds on $516 million against a target of $400 million, and Adveq blew through its €350 million target for Adveq Europe VI to close on €462 million.

While the industry is surrounded by uncertainty, whether about the global economy or what path regulation will take, private equity has proved comfortingly predictable on at least these major talking points.

BEYOND TRENDY: REAL ASSETS CAN PLAY KEY ROLE IN INSTITUTIONAL PORTFOLIOS

P&I September 19, 2016

Investments in real assets have increased 325% over the last five years, according to eVestment Alliance, and that growth is likely to continue. In fact, a 2014 Greenwich Associates survey1 of institutional investors found that roughly half of institutional investors were not meeting their current real asset target allocation.
There is something undeniably “trendy” about real assets, a surprising change in status for such previously stolid investments as farmland or infrastructure. But leading managers of real assets bridle at this idea, instead pointing to the “real” advantages real assets bring to a portfolio in terms of diversification, inflation protection and a source of yield.
“There’s long-term logic to recognizing the potential and enduring value of real assets, rather than just treating them as a ‘flavor of the day’ tactical play,” said Vince Childers, senior vice president, portfolio manager for Cohen & Steers’ real assets strategy. “They are meant to be strategic.”
The fashionable status of real assets does “make it easier to open the door, no question about that,” added Pierre Cherki, head of alternatives at Deutsche Asset Management, “but on the other hand, there is a huge amount of complexity around these assets and making sure our investment solutions meet clients’ needs.”

A store of wealth

A store of wealth

Though real assets have many benefits, they also have limitations, such as lack of comprehensive benchmarks. Overall, despite the buzz and interest, real assets remain poorly understood by many institutional investors. Perhaps the biggest puzzle facing investors is understanding what exactly a real asset is.

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