Coming back from our Miami SWFI Institutional Investor Forum at the Fontainebleau, which had institutional investor capital from all around the globe, I thought about asset owners and the importance of specialist and emerging private equity firms. The significance of domain expertise and founder involvement, to me, is paramount. At our February forum, in which we partnered with the National Association of Investment Companies (NAIC), a vibrant organization that focuses on emerging and diversely-owned managers, there was broad talk on the advent of specialist managers. Asset owners like Washington State Investment Board (WSIB) and Abu Dhabi Investment Authority (ADIA), are under fiduciary obligations to hit their return targets for their beneficiaries whether they are pensioners, citizens, or the government. The sophistic idea of levering up and praying for a market rebound is not a sound strategy for liability-driven asset owners. When opening up an annual report of a sovereign wealth fund or pension, one can easily see that real estate and private equity management fees are big drivers of investment costs. The question looms: Will something change in the private equity industry? Will generalist firms agree to lower fees? Will specialist firms continue to justify their fees based on performance? The chasm between generalists and sector specialists is widening.
Specialist Private Equity Firms
Partly thanks to global quantitative easing, the desire for high-yielding investments has pushed sovereign wealth funds and pensions toward private equity. Sector specialist private equity firms, with their chosen “major,” tend to have a tighter grasp on their domain and exhibit higher discipline when buying or selling companies. To post out-sized returns, institutional investors have sought private equity specialist firms like Texas-based buyout shop Vista Equity Partners, which was founded by Robert Smith and Brian Sheth back in 2000. Vista Equity has bought companies like Misys, Lanyon, Tibco Software and Navex Global. Smith had a fireside chat with Kerry Kennedy of the RFK Center, at our Miami forum, discussing a variety of topics. Part of the discussion focused on Vista Equity’s secret sauce, their in-house consulting group, Vista Consulting Group, which trains and enhances the staff of their portfolio companies. Smith commented Vista Equity can, “teach our managers on how to run an efficient software company.”
Furthermore, Smith, Sheth and their teams seek to find synergies between their portfolio companies.
Smith likes enterprise software as an industry, he stated, “Enterprise software embeds itself with every industry on the planet.”
Being domain experts in enterprise software and data, Vista Equity claims it can maximize returns for their investors by adding value, not just financial leverage (other people’s money).
Sovereign Wealth Funds as a Permanent Capital Base
Sovereign wealth funds surpassed the US$ 7 trillion mark before the start of 2015. In a recent earnings call, Carlyle Group Co-CEO David Rubenstein highlighted a shift in the capital base of limited partners. U.S. pensions are slowly making up a smaller proportion of limited partners. Sovereign wealth funds and other foreign institutional asset owners are adding diversity to the mix. Touted numerous times, Rubenstein sees sovereign wealth funds as a significant source of long-term capital, historically making up 17% of the funding source. The percentage as a funding source has moved up to 37%.
Reducing the Number of Private Equity Relationships, Less is More
Increasingly, limited partners are reducing the number of private equity relationships. In late 2013, California Public Employees’ Retirement System (CalPERS) publicly stated they are reducing the number of private equity relationships. In December 2013, CalPERS had 389 private equity managers. The pension investor giant seeks to have a manageable 100 to 150 PE relationships over time. Agreeing to CalPERS is David Neal, managing director of Australia’s Future Fund, which uses around 25 to 30 private equity managers. These asset owner market signals will lead to more mega buyout funds. For example, Blackstone Capital Partners VII, a fund of the Blackstone Group, is seeking US$ 16 billion.
As more money flows into fewer hands of private equity firms, besides performance, firm specialization and marketing to sovereign wealth funds, Asian insurance companies and overseas pensions, will be ways for stuck-in-the-middle private equity firms to prosper in the long-run.
The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
Since 2010, a rush of foreign capital has been plowed into the U.K. student housing market. On June 22, 2018, Greystar Real Estate Partners, LLC and Public Sector Pension Investment Board (PSP Investments) sold an interest in their joint venture called Chapter to Allianz. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
Turkish President Recep Tayyip Erdogan won re-election, collecting 53% of the votes, while his closest rival Muharrem Ince generated a vote count of 31% – this is with 99% of the votes counted, according to Turkish state media Anadolu.
Erdogan gave a victory speech in Ankara, commenting, “The winner of this election is each and every individual among my 81 million citizens.”
U.S. President Donald Trump is keen on making a mark in the defense industry by launching a Space Force (joining – Army, Navy, Air Force, Marines, Coast Guard) – attempting to ensure American dominance in space. Morgan Stanley eyes a potential windfall, seeing a US$ 1 trillion economy brewing. Morgan Stanley released a note to clients commenting that a Space Force, “could address critical vulnerabilities in national security, raising investor awareness in the formation of what we see as the next trillion-dollar economy.”
Sovereign wealth funds and other asset owners are major financial backers of semiconductors, defense, and companies focused on satellites and rockets. According to SWFI data, since 2014, there has been an increase in direct sovereign wealth fund investment in the aerospace and defense industry. In 2017, sovereign funds directly invested US$ 4.76 billion in aerospace and defense.
On June 18th, President Trump said, “Very importantly, I’m here by directing the Department of Defense and Pentagon to immediately begin the process necessary to establish a space force as the sixth branch of the armed forces. That’s a big statement.”
Sovereign Wealth Investment
From a sovereign wealth fund perspective, many wealth funds are active in investing strategically in the aerospace and defense arena. Mubadala Investment Company has been active in aerospace investments such as Piaggio Aerospace SpA, while SoftBank Group has tremendous exposure to artificial intelligence companies and semiconductors. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
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