New LPs Breathe Life Into Fundraising Market

It will be extremely challenging, with many investors overallocated and short on cash for new commitments or even for funding existing ones. Yet newcomers to the field will provide some welcome relief from the slammed doors that many general partners will encounter, if they dare hit the fundraising trail at all this year.

Buyouts has identified 20 limited partners who want to give you money. Yes, really. They’ve got at least $8 billion to dedicate to private equity. See the table for information on who they are and what they have to spend. They range from those who have already backed a few private equity funds but still have a long way to go to reach their allocations, to those who have just begun a search for consultants to tell them how to proceed with the asset class.

Many of these newbies represent smaller U.S. state, county and municipal plan sponsors that have only recently been granted permission to invest in private equity or who previously did not have the staff to handle the asset class.

Due to their conservative nature, many states, such as the Public Employees’ Retirement System of Mississippi, whose initial exposure to private equity will likely be via fund of funds, previously had laws allowing only investments in equities or fixed income vehicles and prohibiting investments in alternative asset classes.

Others, such as the Maine Public Employees Retirement System, whose program is expected to include venture capital, buyout, distressed and mezzanine funds, had investment boards that simply did not understand the asset class and had to be educated accordingly before feeling comfortable committing to it. And some pension funds, such as the Kentucky Retirement Systems, which is looking to globalize its private equity portfolio by committing to buyout funds dedicated to Europe and Asia to reduce risk and enhance returns, came under fire for low returns and a lack of diversification across asset classes. They have added or upped their targets to private equity to ameliorate those problems.

A lot of these public pension funds now have target allocations to private equity of 3 percent to 10 percent. For example, the $26 billion Tennessee Consolidated Retirement System only received permission to commit to private equity in June and just hired Lamar Villere to lead the program, which has a target allocation to private equity of 3 percent, or about $800 million. The future LP plans tol begin its search for a private equity consultant this spring, so it will not be deploying any capital until later this year. It can pledge to domestic and international venture capital, corporate buyouts, mezzanine, distressed debt, special situations and secondary funds.

Other newcomers to the asset class are sovereign wealth funds, often fairly recently formed, that may have invested in private equity at home, but are now branching out beyond their own borders to enter the U.S. market. Note that the SWFs on our list come from the Asia-Pacific region, as opposed to the Middle East, where the collapse of oil prices has hurt SWFs. (One possible exception to the oil gang holding off this year could be the $50 billion Libyan Investment Authority, which is contemplating investments in U.S. and European distressed banking and real estate.)The Asian-Pacific players have the big bucks and are now getting into the game. They’re staffing up and are just starting to place their mandates. In fact, only a month ago, Switzerland-based Capital Dynamics landed a $330 million mandate from the Government Pension Fund of Thailand for its first overseas private equity program, to be invested over three years. Although the detailed asset allocation is still being finalized, exposure to U.S. buyout funds is being considered as part of the portfolio, according to a Capital Dynamics spokesperson.

“A lot of new investors in Asia have minimal legacy portfolios; most of them are fairly new entities that didn’t exist five years ago,” said Kelly DePonte of Probitas Partners, a San Francisco-based placement agency. “They are natural long-term investors, so as their programs get up and running, an allocation to private equity is natural.”

Industry experts are also seeing increasing participation in the asset class by some European pension plans. “A bunch of UK County Councils have been planning to grow their private equity allocations,” said Michael Sotirhos, a partner with Atlantic Pacific Capital, a Connecticut-based placement agency, adding that the Norwegian Petroleum Fund (managed by Norges Bank) may be getting active, although he notes that this has been rumored for 10 years.

Small Universities

Bruce Ettelson

, partner at Kirkland & Ellis, a law firm that handles private equity clients, sees another group of newish LPs for private equity. “It’s a handful, not a wave, of smaller university endowments,” said Ettelson. Some are moving from zero to 3 percent to 5 percent, and others are going from 5 percent to 8 percent to 10 percent, he said.

Jeffrey Stern, managing partner of Forum Capital Partners, a placement agency in New York, agreed that smaller university endowments raising their asset allocations to private equity is “definitely a trend.” And because these institutions are smaller, so are the commitments they make, which is good for lower-middle-market funds trying to raise vehicles of $300 million to $750 million. Some of these smaller university endowments are at zero, but most have had some exposure to the asset class. Now, however, they’re using the current market situation as an opportunity to increase their allocations. Many who are now at zero to 5 percent are expanding to 5 percent to 10 percent, and most have target allocations in the 10 to 15 percent range, said Stern.

Often these smaller university endowments have only recently hired a professional investment staff, having used a volunteer investment committee previously; they often did not have the staff, knowledge or experience to branch out into alternative asset classes until professionals came on board. Peter Gilbert began as Lehigh University’s first CIO in August of 2007. Gilbert is considered a maverick for his views on relatively high allocations to alternatives. Not surprisingly, Lehigh University’s $1.1 billion endowment fund recently expanded to a 15 percent target allocation, up from 3 percent, with a range of 5 percent to 20 percent, according to Dina Silver Pokedoff, spokesperson. In October, the actual allocation stood at 7 percent. The limited partner anticipates reaching its target will take at least five years through commitments totaling $50 million per year. Some funds Lehigh has backed include generalist buyout fund HarbourVest International Private Equity Partners III-Direct and biotech-focused MBW Venture Partners LP. The university added 17 new absolute return, private equity and commodity managers in 2007, including event-driven and middle-market buyouts.

So, do not despair. The trend of new LPs getting into private equity definitely has legs. Even if every U.S. LP now has a private equity allocation, those at low levels need to fill them and will most likely eventually up them. Many non-U.S. LPs are only now getting into the asset class, so they have plenty of room to grow. And with global pension assets standing at roughly $23 trillion, an average private equity target allocation of 10 percent would translate into $2.3 trillion, far above estimated assets under management today. It will not be a good year for fundraising. But capital is out there, if you know where to look.