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.
If you thought red meat-centric investments ended back in 2007 with Trump Steaks, think again. Singaporean sovereign wealth funds Temasek Holdings and GIC Private Limited are reportedly working alongside London-based Metric Capital Partners to buy a US$ 200 million minority stake in D.ream Group, according to the Financial Times. An entertainment-focused subsidiary of Turkey’s Doğuş Group valued at nearly US$ 1.5 billion, D.ream owns of a number of high-end dining establishments – including the steakhouse chain founded by Turkish chef Nusret Gökçe, better known on social media platform Instagram as Salt Bae.
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Mitsubishi Corporation sold a 5% stake in Capula Investment Management LLP, a hedge fund, to Dai-Ichi Life Insurance Company.
Mitsubishi sold the stake to focus on other areas of investments such as real estate and logistics.
Mitsubishi acquired the hedge fund stake in October 2008. Capula Investment Management was formed in 2005 by Yan Huo and Masao Asai, as a spin-off from Mitsubishi UFJ Securities International. In 2012, the Petershill fund managed by Goldman Sachs acquired a 20% stake in Capula Investment Management.
OMERS Infrastructure Management, formerly known as Borealis, signed an agreement to buy Leeward Renewable Energy, LLC, a U.S. wind-power developer, owner and operator from affiliates of infrastructure management firm ArcLight Capital Partners, LLC. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
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