Measuring the market

As the fundraising market dips, mega-firms may have all the more reason to seek permanent capital bases with a public float, writes Matt Levin.

By now, Dan Slack’s callback list must be a mile long.

The executive director of the $16.6 billion Illinois State Universities Retirement System recently told PEO that the pension would continue to make private equity commitments despite being overweighted to the asset class.

ILSURS, which last week disclosed a $100 million commitment to Adams Street Partners’ latest fund of funds, currently pegs its target allocation at 6 percent; the pension’s actual allocation as of 30 June was 7.6 percent.

Unfortunately for GPs, most limited partners are not adapting Slacks’ approach.

As the denominator effect continues to roil LP alternatives allocations, the fundraising market has taken a severe dip, with many placement agents and investor relations specialists calling it the worst they have seen since the bursting of the tech bubble in the early 2000s.

The California Public Employees’ Retirement System, the California State Teachers’ Retirement System and The State Investment Board of Wisconsin are just a small sampling of US LPs that have watched their actual private equity allocations bump up against or exceed their target ranges.

Fundraising for private equity buyout funds was down 20 percent for the first half of the year, according to a study by Dow Jones – and that was before the public market’s tumultuous past month sunk LP assets under management even further.

Traditionally during bear fundraising markets the so-called “power pendulum” shifts towards limited partners, and for now that axiom seems to be holding true. According to several placement agents and fund of funds managers, GPs are increasingly more willing to give ground on transaction fee splits, with some even opening up clawbacks and waterfall structures for negotiations. 

But in the long-run, a more challenging fundraising landscape could ultimately propel GPs to reconsider an option loathed by many LPs – going public.

According to the executive of at least one major private equity firm, GPs that have considered a public float in recent years may be even more motivated to do so in the current climate in an effort to create a “permanent” capital base.

That sentiment rings especially true for firms relying on management fees to expand their franchise beyond private equity and into advisory, fixed income, and other businesses. When firms are forced to slash fundraising targets or when a fund stays in the market longer than expected, those business development plants might have to be put on hold.

As the last few weeks have demonstrated, the public markets can be very fickle themselves and can erase a listed company’s capital base in a heartbeat. But for GPs contemplating the fruits of an IPO, the extra miles logged on their latest road show may be reason enough to test the waters once they calm down.