THE ANNUAL REVIEW 2010 - PEI Media

page 124 private equity annual review 2010
lower fees. Firms that seek to cash in on this growing trend should
be prepared with creative ways to work with LPs. ‘As plan sponsors
get more comfortable with the asset class, they have started
venturing off and doing much more on their own,’ says a fund of
funds source.”
JUNE
Investor relations is a lot about education
“A vital part of a general partner’s job is the education of institutional
investors, even institutions with which the GP has enjoyed
a long relationship. Turnover at institutions like public pensions
is fairly heavy – or at least heavy compared to the long tenure
of the senior executives at some of the world’s biggest private
equity firms. New board members at pensions or foundations
often have no experience with alternative investments, and no
understanding of the long hold periods, say, or the J-curve. Part
of the importance of on-site visits for GPs is being able to answer
questions from these newbies, and possibly dispel some of the
misinformation new board members may bring to the table about
private equity.”
JULY/AUGUST
On the increasingly public US pension board meetings
“In the wake of pension pay-to-play scandals and the financial downturn
that hammered pensions’ private equity portfolio, the big
institutions’ answer has been to open the windows and let the
public see more of what goes on inside. All this openness means
GPs need to be – at the very least – aware they are being recorded
and that members of the public, or the media, can call up their
performances and listen to every word. An interesting side-effect
of this drive for transparency is the potential conflict it creates
with Securities and Exchange Commission rules on private equity
fundraising. ‘Regulation D’ bars managers from soliciting commitments
via an ‘advertisement, article, notice or other communication
in the press’. How the SEC would feel about a GP pitching their
next fund in a live internet broadcast has not yet been tested, but
could prove a contentious issue.”
SEPTEMBER
Throwing good money after bad to rescue a fund
“In deciding whether to invest additional capital to rescue original
commitments, are LPs in fact throwing good money after bad? Is
recapitalising a fund actually worth the financial investment, time
and energy involved or is allowing liquidation the best option
for all? In the case of Fortress, it seems the additional capital
committed by LPs to support investments in the 2004 Fund III
may be paying off. In September, 2009, Fund III was generating
a -1.21 percent internal rate of return. By 31 March 2010, the
fund was being held at a return multiple of 1.03x and producing
a 1.24 percent IRR.”
OCTOBER
LPs keep the purse strings tight
“Disquiet among investors is not consigned to the rhetoric of
the conference circuit. Developments at two firms over the
summer illustrate how serious LPs are about getting the most
they can from the asset class. Elevation Partners – the mediafocused
firm led by rock star Bono – was recently denied a
fund extension by LPs, while energy-focused firm ArcLight is
finding fundraising tough going, with LPs demanding more distributions
before committing capital to the new fund. ArcLight
raised about $2.1 billion for both its third fund in 2006 and
its fourth fund in 2007. It’s not clear how much ArcLight has
raised for its fifth fund, but sources say the firm is switching
placement agents amid the fundraising. MVision, which was
helping ArcLight raise the fund, is off the assignment, sources
say. The cases of Elevation and ArcLight make clear that limited
partners want to see results before placing more capital with
firms they’ve backed in the past.”
NOVEMBER
On the ILPA guidelines’ first birthday
“The guidelines codified what many LPs had been thinking, and
even asking for, on a more informal basis for years: ideas LPs
have long pursued like cutting back management fees and making
sure those fees were not major profit centres for firms; directing
100 percent of deal fees back to the fund; repaying LPs all
contributed capital plus a preferred return before GPs begin to
receive carried interest. Over the course of the last year, the
guidelines have inspired discussions between LPs and GPs about
fund terms and conditions. Many funds that have come to market
this year have found LPs looking to negotiate on fees and other
terms before making any kind of commitment.”
DECEMBER/JANUARY
How much information can LPs handle?
“LPs, of course, want all the information they can get from GPs.
Details about underlying portfolio companies are vital to help
an LP understand its exposure to various sectors, strategies,
geographies and leverage levels, among other things. In this way,
an LP is not looking at his private equity holdings in terms of
funds or GPs, but in terms of portfolio companies. This level
of detail gives LPs a competitive advantage, participants in our
LP roundtable agreed, but that does not mean it needs to be
communicated to the wider public. For some LPs, however,
this may be more detail than they are ready to accept. Many
institutions invested in the asset class are under-staffed, and
have alternatives teams that are seeing too many PPMs. They
simply don’t have time to really dig into micro-details. Through
due diligence, they figure out which managers to trust with
their capital.” n