Private Equity: The Forces Moving Markets

Webinar with Professor Tim Jenkinson and Chris Kallos, Partner, Kirkland & Ellis, titled, “Private Equity: The Forces Moving Markets” from the Saïd Business School, University of Oxford.

Private Equity: The Forces Moving Markets

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Q4 hedge fund letters, conference, scoops etc

Transcript

Great thanks Steve. And Chris thanks very much for hosting us again. This is becoming an annual event so and could always get an update on where the market is and on the conference as I go to everybody's talking about the sort of heat of the market how hot it is. There's lot fundraising going on. All big funds being raised again and people seeming to be able to raise money very rapidly. That's one of the leaders in fund formation cut the must see an all but must be at the bleeding edge of that as you get the flow of the funds which come into the market. So what's your take on the state of the market. Are we back in 2007 are we gone that is it should we be worrying to LPs. What's your take on that.

Sure it's a robust market. It doesn't quite feel as frothy as prior markets where you know you started scratching your head about how long it's going to go for. So it's not kind of caught on fire but it is robust and for managers with good track records they tend to be raising funds sizes a little more slowly than they did. Now last time this happened 10 years ago and so existing Opie's are really worried about getting their allocations or the allocations they want in these funds. And as I said existing LPs re having a hard time getting into a lot of these funds. We're seeing one in done closings. Sometimes fundraises can take a year or more. We're seeing countries that have one closing either closing or you can't get in or you have to at least have committed at closing and that might be closing later. The there's a lot of dry powder still which was always something people keep an eye on. I saw it listed as 2 trillion. Which interestingly is only supposed to fund three years of investments one in 2007 which you referenced. There's about 1 trillion of tripe out Petter and that was expected from four years of investment. So there's more money to put out there into investments as well. And I think it also helping the market is that for the fifth year in a row the funds have returned more money to investors than their Kaufmann's customers. And so that's helping investors. Allocation in the aggregate are [inaudible] can only get larger. And so that's also driving and market economics are still kind of 20 which an 8 percent saving return hurdle. So it hasn't really resulted in a dramatic change in the economics although we are seeing a premium carrier and exceptional cases usually we're headed to a high multiple.

Yeah it sounds sounds like it was a classic definition of a seller's market in a way that you know that the funds are able to dictate the terms is this is it bifurcating a tool into the ones with good reputations been around for a while. Rob was on the early stage LPs you know the early say SEPs I mean are we seeing a lot of new GPs being created or is it really consolidation of all of the big brands who got established track record.

To some extent both. It's a bifurcated market in that people who have great track records or otherwise have a great story are able to raise you know everything they're looking to raise and to do so relatively quickly. People who have a more challenging story have more challenging time and it may be that they can't hit their targets even with you know two years of fundraising in terms of new managers. I think we're at a point in the market where you know succession fallout if you will as a result it in lots of new managers coming to market that have actually good track records and are able to raise money. So there's a first time manager you know situation where you have three people who've never worked together before deciding what to get into the fund business coming out of some related business. That's really hard but when you've got groups that are sort of either spinning out you know as a group with or without the blessing of the original home for those folks that can be a really good story. And we're seeing a lot of that right.

In terms of the economics I mean we always expect that in a way when it's a seller's market you expect that maybe the terms don't get any better for the investors.

But all that, is it really, when are we seeing innovations that you know that people are getting rid of the preferred return and the hurdle rates or are they asking for premium carry more than 20 percent of the profits. Are we seeing much of that or is it still the exception and what you do see it. What does it tend to be.

I think most of the GP leverage right now is driven towards increasing more fund sizes modestly and getting fundraised down quickly. Riots where there you know I would say that's where most of there's no sort of pushing the term. Some are pushing the terms on premium carry and that's the term that makes the most sense to push LPs or.



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver