Editor’s Note: Today’s guest column comes from Chris Douvos of the The Investment Fund for Foundations.
Looking back on my days growing up in Brooklyn, I remember a local WWII veteran who would tell us boys about being a Flatbush kid in the Marines in 1942. He often laughed about meeting hundreds of guys from around America who didn’t seem to speak any English. “Fugghedaboutit! Dose guys all spoke Texan!”
And, indeed, such a language divergence plagues private equity today. After all, our performance touchstones – quartiles – emphasize the relative in an increasingly absolute world; we’re speaking one dialect and the asset allocators another. Interestingly, relative metrics gained sway because of the dis-integration of portfolios. Armed with copies of Pioneering Portfolio Management, asset allocators knew they wanted PE, but they found it challenging to integrate the asset class – with its illiquidity, irregular cashflows, and stale prices – into portfolio analytics. As a result, this thrilling, but naughty, asset became a part of the portfolio, but apart! from it in many ways.
Having been a source of illiquid heartache during the downturn, private equity entered its post-heroic phase and many investment committees are contemplating how to re-integrate PE into their portfolios so they can think holistically again; as a result, crises of confidence abound with respect to taking on new commitments. And perhaps the most serious problem right now is that people around the asset allocation table all speak different languages.
In fact, a Monday meeting at an endowment or plan sponsor can be like a European Parliament meeting: There’s the cat that covers VC, he’s speaking a sun-drenched, passionate language analogous to Italian (“sprazzo di sole” has the same hopeful cadence as “cashflow breakeven.”) The real estate manager speaks the frenetic Merseyside Scouse of a BBC sportscaster who’s seen too much hooliganism. Meanwhile, the public market folks speak a frugal Dutch, as they haggle over single basis points in manager fees. The hedge fund team speaks a precise, formal language that is the finance equivalent of! German (too much time thinking about Sortino Ratio can give you Weltschmertz, no?)
In such an environment, crowing about top quartile performance, or telling stories about “impact companies” can fall on deaf ears, particularly with the liquid asset constituents of the portfolio still resent that their portfolios were used as ATMs for increasingly frequent PE capital calls between 2004 and 2008.
So how can a GP raising a fund speak in terms that resonate across the portfolio? First, I think we all in PE need to be more thoughtful in articulating our return expectations while taking an honest accounting of risks. Focus not just on rear-view performance – which should properly be considered a lagging indicator, not a leading one – but also on implicit assumptions: Why are your returns achievable? In what environments will the fund outperform? Underperform?
Said another way, asset allocators live in worlds of probability distributions, observed risks, and well-established performance measurement; they measure and predict performance. By failing to give thought to their metrics, we are perceived as soft and non-rigorous. They speak the language of efficiency while we tout inefficiency; they’re from Mars and we’re from Venus.
Remember, PE is a return enhancing asset, one that must be considered in the context of the opportunity cost of equity capital; for asset allocators that cost includes the drag from the cash they have to keep at the ready for PE capital calls.
To that end, it can be helpful to give people a sense for expectations of capital calls and distributions, with a particular eye toward what one’s doing to accelerate cashflows. Today, liquidity is prized and it seems most folks are trying to shorten the duration of their portfolios. Asset allocators worry about facing negative PE cashflows ad infinitum; any visibility into when cash might come back is critical. After all, there’s nothing like returns to silence critics. A little “moolah in the coolah” goes a long way toward answering the question on everyone’s lips when it comes to PE: “Why bother?”
Chris Douvos co-heads the private equity division at The Investment Fund for Foundations. Prior to TIFF, Chris was at Princeton University Investment Company, where he helped select and monitor managers in illiquid asset classes.
Top Three
Vue, Britain’s third-largest cinema chain, is looking for new private equity backers in a deal that could be worth 400 million pounds ($627 million). Cinemas in Britain are owned predominantly by private equity groups: Terra Firma owns the largest group, Odeon, while Cineworld, in second-place, is owned by Blackstone.
Australia’s $21 billion private equity funds could be cut by up to a quarter thanks to a loss of investor confidence, according to Reuters. Australia is home to about 50 buyout firms, 15 venture capital firms and 10 global private equity firms.
Private equity company WL Ross has entered into a strategic partnership with The Capital Markets Cooperative, a mortgage capital markets firm. CMC has a client base of banks that originates over $25 billion in mortgages annually. WL Ross owns American Home Mortgage Servicing, which services $85 billion of non-prime mortgages.
VC Deals
Investment firm Partners Group, based in Zug, Switzerland, has provided subordinated debt financing of AUD 27 million ($25 million) for the Newcastle Coal Infrastructure Group to build a new coal export terminal in New South Wales, Australia. The bulk of the coal is mined for export and NCIG plans to expand the capacity of the export terminal for 53 million tons a year.
Ballast Point Ventures, a Florida-based venture capital fund, has invested $6 million in Watermark Medical Inc., a privately held medical products company. Ballast will hold a minority stake in Watermark and one seat on its board.
CytomX Therapeutics, a San Francisco-based biotechnology company, has completed a $30 million Series B financing round, the company announced. The round was led by Third Rock Ventures with help from the Roche Venture Fund. CytomX, which develops antibodies, will be using the funds to fund further research and move the company to the Bay Area.
Buyout Deals
Energy & Minerals Group is attempting to buy the Canadian mining company Baffinland Iron Mines. The deal would value the company at C$274 million ($265 million) and give Energy & Minerals access to a key mine in the Canadian Arctic. Energy & Minerals already holds a 6 percent stake in Baffinland.
Private equity fund Mid Europa Partners intends to buy another 25% of Slovenia’s largest food retailer, Mercator, according to Slovenian news reports.
Private equity firm WL Ross & Co completed a $106.7 million purchase of stock in Sun Bancorp Inc. Other investors included the bank’s founding Brown family and other institutional and accredited investors. The sale comprises around 4.7 million shares of common stock, 88,000 shares of preferred stock and it is estimated it will generate around $98.5 million in funds to the company.
PE-backed M&A
BD White Birch Investment, which is backed by Black Diamond Capital Management, has submitted the highest and best offer for the White Birch Paper Company. White Birch Paper Company is the second-largest newsprint manufacturer in North America. White Birch expects approval for the sale at hearings in Canada and the U.S. on September 24 and 30, respectively.
PE Exits
Private equity firms The Carlyle Group and Kennet Partners have sold out of FRSGlobal, a Brussels-based financial reporting and risk management business. The financial terms of the deal were not disclosed. FRSGlobal was bought by Wolters Kluwer Financial Services, a Minneapolis-based risk management company.
Firms & Funds
Kohlberg Kravis Roberts & Co has raised $500 million in senior secured notes. KKR had originally planned to sell $500 million of new common units but later cancelled the plans. Rival firm Blackstone had raised $400 million earlier in the month.
Human Resources
Clairview Capital Partners, a California-based real estate private equity firm, has hired Rachael A. Felker as an asset manager. Felker had previously worked for Buchanan Street Partners. Clairvue is owned by its Jeff Giller and Brendan MacDonald, with investment funds managed by Goldman Sachs Asset Management’s Private Equity Group.
Hilkka-Maija Katajisto will leave her position as CapMan Group’s head of HR and resign as a member of the CapMan board at the end of the year, according to the company. Katajisto joined the company in 2006 and joined the board in 2007. Niko Haavisto will act as a temporary replacement until her successor is found.
News items written and compiled by Research Editor Eamon Beltran and Contributor Barry G. Whyte
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