To be sure, investment officers at more mature investors may not be so eager to pick up the phone. But newer investors such as
All told, Buyouts has identified 10 prospective limited partners that together have at least $1.4 billion to spread around this year to GPs bold enough to hit the fundraising trail and lucky enough to nail down a pledge. These investors range from those that have already supported some private equity vehicles but are far from their target allocations, to those whose investments in the asset class are negligible and thus still have huge holes to fill.
One theme common to a number of pension funds we quizzed was their interest in small to mid-market buyout funds. Investors are attracted to such funds for the simple reason that they acquire companies that you can’t access in the public markets, said Russell Pennoyer, president of Benedetto, Gartland & Co., a New York placement agency. “We’re going back to basics, to the roots of private equity, where the managers are very operationally focused, where they have sector knowledge and the ability to influence the companies they buy.” Secondary funds are also attractive to new investors in the asset class, in part because they can get vintage-year diversification very quickly. Other advantages include the ability to get capital back quickly, and to establish relationships with top-tier GPs that may not be back in the market for a while.
Pennoyer added that for GPs who have all the ingredients people are looking for—a strong team, a sound strategy and a track record—there will be capital. “When the market is really frothy, it’s hard for newcomers to get attention because people are re-upping with brand name groups,” said Pennoyer. “Now not as many brand name groups are out there, so it’s probably an easier time to get attention if your story is interesting.”
New investors have emerged as an especially important source of capital to buyout shops. On the one hand, many established LPs have emerged from under the cloud of the denominator effect, in which the decline in the stock market pushed up their allocations to private equity relative to their entire portfolio. But many are still not pledging to funds, citing a lack of distributions with which to make new commitments. Those that do have capital to commit have less of it than in previous years, and attitudes toward the asset class appear to be undergoing a fundamental shift.
According to a January survey report from Preqin, a London-based data provider, investors are focusing more on understanding their existing portfolios, while taking much more time to consider new vehicles. About half of the investors surveyed plan to make their next pledge in the first half of 2010; one-quarter are unsure of the timing of their next pledge; 16 percent will wait until the second half of 2010; 4 percent will not invest again until 2011; and 4 percent won’t invest for at least two years.
New Programs
The $24 billion Arizona State Retirement System, which launched its private equity program in 2007, raised its target allocation to the asset class to 7 percent from 5 percent last October, while establishing a range of 5 percent to 9 percent. Although it has commitments equaling $1.5 billion, or about 6 percent, it has funded only about 1.6 percent.
The LP will likely commit about $450 million annually for the next three years in strategies such as distress-for-control funds, turnaround funds and small to mid-market buyout funds with a targeted fund size of less than $1 billion, Private Equity Portfolio Manager Richard Henkel told Buyouts. Henkel said he likes small to mid-market buyout funds in part because they tend to focus on underserved markets where small companies need capital to grow. As for turnaround opportunities, Henkel observed that “those companies that cannot find growth capital will stagnate, and those that need operating capital will be faced with covenant violations, opening the door for investors in distressed companies.”
The state’s pledge sizes average about $40 million to $50 million, with a low of $10 million for venture funds and a high of $80 million for buyout, energy and distress commitments. Henkel also said that Arizona is looking at opportunities in the secondary market, but has not yet decided the best way to approach it. “There are many shades to secondaries,” said Henkel. “We have planned roughly $300 million to secondary and co-investment activity [in 2010]. Whether we will actually commit is to be determined.”
Arizona made its first private equity pledge in September 2007. A partial list of commitments include those to mega-fund
Among other new investors this year, San Diego City Employees’ Retirement System will likely commit about $100 million in its fledgling private equity program, Investment Officer and Head of Private Equity Corey Buuhoan told Buyouts.
The $3.7 billion LP is looking at J-curve mitigation strategies—ones that start returning cash to investors right away so they can then re-commit it. Such strategies could include secondaries, distressed debt and mezzanine. “The rationale for that is we are a new program, so we want to mitigate the J-curve as much as possible,” said Buuhoan. “In addition, we do believe that this is a good market environment for J-curve mitigation strategies.” The LP also is considering commitments to small to mid-market buyout funds, ideally via a secondary fund.
Buuhoan gave a ballpark figure of eight to 12 for the number of pledges to be made this year by San Diego. The LP uses two fully discretionary managers,
For its part, the West Virginia Investment Management Board has a goal of pledging $285 million to private equity this year, said Private & Public Equity Investment Officer Jim Herrington. Last year, the LP pledged $183 million, short of its goal of committing $265 million. “Some of the deals we thought we might complete in 2009 were moved out into 2010,” said Herrington. “And some of the market turmoil raised the bar a bit, so we were giving extra scrutiny to everyone.” Herrington added that although he anticipates committing more to private equity in 2010 than in 2009, nothing is certain. “It is not like the ‘leftover’ 2009 money will move directly into 2010, and only 2010,” he explained. “Each year we re-evaluate our needs and then project commitments five years into the future.”
At the top of West Virginia’s wish list for 2010 are small to mid-market buyout funds, and “we’ll likely make a roughly $25 million commitment, minimum, to a VC fund of funds” said Herrington, possibly to the
In February 2008, the $10 billion West Virginia Investment Management Board began implementing its private equity program. As of November 2009, the LP had made 14 private equity commitments, including those to European and U.S. buyout fund
Like many new investors, West Virginia also has an interest in the secondary market. Herrington said that two years ago, the LP was thinking “no” when it came to secondaries, but last year that “no” turned into a “maybe.” He added: “Sometimes some of the great funds become available at low prices.”
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