What you told us about West Coast private equity and venture capital

December 2016

There’s a tremendous amount of capital in the market – that $1 trillion capital overhang needs to find a home. With so much uncertainty in emerging markets, lots of capital returned to the US to be invested in plays like energy.

The big story is the increasing pressure from investment boards for transparency on fees – with the pressure on CalSTRS to provide complete disclosure a landmark case.

Meanwhile, Environmental, Social and Governance considerations are growing in importance. Is there a trade-off between ESG and returns, are they complimentary, or are they in fact entirely unrelated.

Key questions:

1. When will the correction come, and what will the magnitude be?

2. How will the interest rate hike by the Federal reserve affect the market and what will be the most attractive strategies afterwards?

3. Is there a bubble?

With this in mind – and a correction looming – manager selection is what keeps you up at night. LPs want managers who will outperform in a downturn, who can source the best companies for reasonable prices and then grow them to add value, and who can offer diversification or specialist perspectives.

“We are continuously investing and looking for strong managers who will be able to outperform their peers during a downturn”

“We meet with a few hundred managers a year. It is a pretty systematic screening process. We are looking for more established managers who have been successful and are well-established going forward”

“We have a separate strategy around how we invest in smaller new managers.”

The LP story What’s the story for your organisation? We’d like to know:

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Let’s talk returns

Some disappointing returns, coupled with a sense that the industry lacks clarity here, have opened a debate over the two-and-twenty that is getting difficult to ignore. Check out Guy Hands of Terra Firma laying out the problem.

There may be solutions on the operational side, however. For one, managing subscription lines in your funds to reduce legal fees, tax exposure and regulatory risk.

How you structure teams may also help. For the venture capitalist, you advised, “help grow the team and get unique model that doesn’t make losses at scale”. The buyouts side, meanwhile, needs to tap the right talent, keep only the right products, focus in on mergers and acquisitions and cut costs.

Growth equity has established itself as a distinctive asset class to venture capital. But what are you finding interesting given high valuations? Is it too overcrowded?

Midmarket private equity is hot, and everyone is chasing the next fund in this space – in part because the banks are still struggling to provide capital to SMEs. The risk-return profile is varied but attractive, and larger LPs are looking to get a piece of the pie. What does this mean for fundraising?

Private credit is another area benefiting hugely from sluggish banks, and from the remarkable low interest rate run. The latter has emboldened institutional investors chasing yields of 3-4%. Thanks to demand, strategies have proliferated in private credit, and every manager has a niche which they leave at their peril. Keep an eye on quietly reliable trade finance and peer-to-peer lending.

Distressed debt: when will its time come? It’s generating handsome returns, and a distressed fund could be a good place to be with a correction in sight.

GP strategies and operations

We’re close to record levels – meaning competition and successful allocations are high on the agenda.

GPs are making bold moves from large generalist funds to smaller specialist ones – but LPs are showing restraint in reinvesting cash returned from 2006/07 vintages.

First-time funds have flourished in response to

Fundraising

Lots of capital is chasing private companies – with the valuations in the private market much higher than in the public.

A lack of liquidity is looming – companies have stayed private longer and sometimes swapped investment rounds for IPOs (especially for tech companies and those offerings that were expected to go well).

IPOs in general have been less successful than hoped this year – raising more questions about whether we’re in a venture capital - tech bubble.

oversubscription in the large, name-brand funds. There’s interest in micro funds and emerging managers with niche outlooks. However, it should be noted that , 48% first time funds are non-traditional, including pledge funds, evergreen funds and direct lending vehicles.

Fundraising

How to be a ‘solutions provider’: listen to a panel of experienced fundraisers from SuperInvestor, our biggest

and brightest LP-GP relations event.

Matters of debate

For LPs: how to get into the most sought-after funds, and should you bother?For GPs: how do you keep a balance of LPs – what’s the ideal mix?

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