12 ★ FINANCIAL TIMES Tuesday20 August 2019COMPANIES
W
hat’s wrong with private equity? Not
much, if you look at the numbers. Record
dealmaking, record fund sizes, record
amounts of cheap debt to juice profits.
That’s made everyone a winner. Investor
returns are outpacing other asset classes. Private equity
firms, and their staff, are enjoying bumper pay days.
BlackRock, though, sniffs a competitive opportunity.
The biggestasset manager — with nearly $7tn of funds at
the last count — has so far only dabbled in alternative
investments. But its debut primary private equity deal last
week, when its new Long Term Private Capital fund
bought the bulkof the Authentic Brandsmarketing busi-
ness for $870m, signalled a fresh departure.
Larry Fink’s business owns more listed equities than
almost anyone else. But as the launch blurb for the LTPC
fund makes clear, public companies are going out of
fashion: the number of US groups has nearly halved in
20 years.
Moving into private equity seems logical. It should
secure a slice of a higher-margin business at a time when
public equity managers are suffering an ongoing squeeze
on fees.
Aping his record in listed equities, Mr Fink’s plan is to
take business from the incumbents by disrupting what he
sees as a cosy and costly business model. LTPC will under-
cut their fees and de-risk investments by reducing the debt
levels of portfolio companies.
One rattled senior executive at a big buyout firm said:
“BlackRock incinerated the fee structure in equity funds.
Are they going to do the same for private equity?”
The pitch has been enough to raise nearly $3bn from five
big investors, led by the Minnesota State Board of Invest-
ment, plus a small chunk of BlackRock’s own cash.
The group is coy about the exact fees it will levy but it is
fair to assume they will be substantially less than the 2 per
cent management fee plus 20 per cent “carry”, or perform-
ance fee, that is the private equity norm. As the LTPC fund
grows towards its $12bn target, BlackRock says the man-
agement fee will fall further.
So far, so laudable. But this is not a risk-free initiative.
For one thing, valuations
make this an odd time to
break into private equity:
deal prices are at record
highs. The Authentic Brands
transaction is estimated to
have been done at a multiple
of 16 times core earnings.
For another, the private
equity bubble is widely
expected to burst. The downward trend in interest rates
means the pinprick won’t come from higher debt costs, as
seemed likely six to 12 months ago. But the risk of reces-
sion across much of the west now seems high, potentially
dangerous for highly leveraged companies that often have
little headroomif business dips. BlackRock’s plan is to cut
debt levels, but that cuts potential returns.
Of potential concern, too, is another quirk of Black-
Rock’s model: making its fund a “perpetual capital” vehi-
cle, rather than the traditional 10-year structure.
This is not unprecedented. There has been a clutch of
perpetual capital launches from established operators of
late. Brookfieldis poised to create a $5bn fund, with a
potential open-ended structure, into which it would
reverse Genworth, a Canadian mortgage insurer acquired
last week.
But the open-ended nature has obvious pitfalls. Returns
are designed to be lower. And there is no set time horizon
for investors to be paid out.
Most seriously, there are obvious, if crude, parallels with
the liquidity mismatchesthat have haunted the likes of
GAM,H2O Asset Managementand Woodfordin recent
months. If investors are not tied in for a fixed period and
are allowed, in theory, to make short-term redemptions, it
is easy to see the scope for stress when the underlying
assets are unwieldy holdings in a small number of private
companies.
Some perpetual vehicles are stock-exchange listed,
boosting potential liquidity. BlackRock’s recipe for dealing
with the issue is to limit investor redemptions to an annual
three-month window, with an initial tie-in until 2022.
Investors can sell to others in the fund or to a new investor
if one can be found. Underlying holdings could also be sold.
But the model is untested in a stressed market.
Investors should welcome BlackRock’s entry to the mar-
ket, with its promise to cut the cost and the risk of private
equity. For Mr Fink and his team, though, it is not without
danger.[email protected]INSIDE BUSINESS
FINANCE
Patrick
Jenkins
BlackRock has
rattled the private
equity industry
The firm has so
far only dabbled.
Its debut deal
signals a freshdeparture
MILES KRUPPA— SAN FRANCISCOJuul Labs, the US ecigarette start-up,
has raised $325m in fresh funding as it
plans international expansion and
faces growing scrutiny from politicians
and regulators at home.The cash was raised through a bridge
financing structured as a convertible
note, said three people familiar with the
deal, a form of debt that start-ups some-
times use to raise money between
equity sales. It adds to the billions of dol-
lars Juul pulled in last year from private
investors andAltria, the Marlboro
maker, whichpaid $12.8bnfor a 35 per
cent stake in the company in December.
Tiger Global Management, which led
an investment valuing the company at$15bn last July, participated in the new
debt offering, one of the people familiar
with the transaction said. The firm
declined to comment.
Juul disclosed the fundraising yester-
day in a filing with the Securities and
Exchange Commission, which said it
had raised the money from four inves-
tors.
The ecigarette maker quickly rose last
year to become one of the largest ven-
ture-backed US companies, worth more
on paper thanAirbnb, the home rental
provider, andPalantir, the data analyt-
ics company. Altria valued the company
at $38bn with its share purchase.
Extra cash could bolster Juul’s efforts
to sell its products outside of the US,
where the company has been scruti-nised for the uptake of its products
among teenagers. This month it began
selling an ecigarette in the UK that mon-
itors vaping habitsand requires users to
undergo multiple age verification steps.
The authorities in San Francisco
barred the sale of Juul and other e-ciga-
rettes in June, becoming the first city to
impose an outright ban to curb under-
age vaping. Juul, based in the city, has
waged a lobbying campaign arguing that
the ban will punish adult cigarette
smokers trying to quit instead of pre-
venting underage sales.
Ecigarette companies are expected to
submit their products for Food and
Drug Administration approval, which
would allow them to be sold when the
ban takes effect early next year.Tobacco
Juul raises $325m ahead of expansion drive
CLIVE COOKSON— LONDONJuvenescence, a biotech start-up seek-
ing to increase human longevity, has
closed a $100m funding roundthat
valued the UK company at $500m as it
heads for a listing next year.Jim Mellon, the investor who chairs
Juvenescence, has persuaded other bil-
lionaires to buy into his vision of making
money by extending healthy life
through science.
Michael Spencer, the City of London
entrepreneur, has put in $10m through
hisIPGLpersonal investment company.
Another $10m has come fromMike
Cannon-Brookes, co-founder ofAtlas-
sian, the Australian software company,
through hisGrok Venturesvehicle.“The bottom line is that the science is
catching up with the aspiration of every-
one on the planet to live in robust health
for as long as possible,” said Mr Mellon.
“We aim to treat diseases of ageing and
to extend life by understanding the key
biological pathways involved in ageing.”
Juvenescence is creating what it calls a
“longevity ecosystem” — a network of
companies co-ordinated by a group of
about 20 scientists, drug developers, AI
specialists and financial experts.
Investments by Juvenescence have
been concentrated in the US, which
leads the world in anti-ageing research.
“The UK is the number two in this area
of science,” said Mr Mellon, “and we’re
doing a couple of deals in the UK that are
not yet announced.”“The company will seek a public list-
ing some time next year, depending on
market conditions,” he said. That is
likely to be in the US, on the NYSE or
Nasdaq, rather than in Europe.
Juvenescence is the world’s best-
funded company specialising in longev-
ity promotion, according to Mr Mellon.
The closest competitor isLife Bio-
sciencesof Boston, which raised $50m
in January.This has a similar range of
“daughter companies”and, unlike Juve-
nescence, operates a research lab.
Encouraging such start-ups isLongev-
ity, an early-stage fund in California run
by Laura Deming, with $37m in assets
under management. Companies in
whichshe has invested have collected
more than $500m in follow-on funding.Healthcare
Anti-ageing biotech closes $100m round
EDWARD WHITE— SEOULKim Sung-joowas seemingly handed a
poisoned chalice two years ago when he
was appointed chairman of South
Korea’sNational Pension Service, the
third-largest pension fund.
The sovereign fund, which has
Won700tn ($578bn) under manage-
ment, had just been embroiled in a cor-
ruption scandalthat led to the jailing of
Mr Kim’s predecessor as well as South
Korea’s former president Park Geun-
hye, andLee Jae-yong, heirapparent to
theSamsunggroup.
Now the NPS is embarking on a drive
to boost foreign assets, a move that will
see it hunthundreds of billions of dol-
lars in offshore deals over the next five
years.
Mr Kim is at pains to show that wor-
ries over undue influence fromKorea’s
political and business elite are in the
past. “My first priority was to regain
public trust... [now] I believe our
transparency level is one of the highest
in the world,”he said.
The fund, under intense public pres-sure to increase its pool of money to
cover the country’s ageing population, is
turning to offshore investments as it
pivots from an overweight position in
the domestic market.
“The home biassituation is very seri-
ous,” he said. “We expect to shift
our... domestic-to-foreign ratio
[from] 7:3 to 5:5 by the end of 2024.
That is a really drastic shift.”
Based on the fund’s internal forecast
of increasing its holdings to Won1,019tn
by 2024, the ratio change implies
roughly more than doubling its foreigninvestments — across equities, fixed
income and alternative assets including
private equity and real estate — to about
Won509.5tn within five years, from
Won191.9tn in 2018.
The push offshore, analysts said,
would transform the NPS into a much
more important institutional investor
with a war chest.
ButPark Yoo-kyung, a Hong Kong-
based adviser with Dutch group APG
Asset Management, said that the NPS’s
reporting requirements, which include
regular reviews by the parliament
and cabinet, meant its investment man-
agers were not “fully free” in their
decision-making.
“They need to go through the national
assembly every now and then. Good
scrutiny is good, but there is massive
scrutiny there; it essentially makes
investment decisions slow down,” Ms
Park said.
Mr Kim acknowledged that the pace
of the fund’s internal processes had
been a hindrance as the group sought to
partner with outside asset managers for
overseas deals.
In response, he said, the NPS
had streamlined its decision-making:
“We are going to be more flexible
with regard to the scope of invest-
ments”.According to the fund’s targets, asset
allocation will involve domestic fixed
income and equities falling to about 35
per cent and 15 per cent of its portfolio
respectively, from 45.3 per cent and 18
per cent this year.
Correspondingly, the share of global
equities in its portfolio will rise to 30 per
cent from 20 per cent, alternative
investments will rise to 15 per cent from
12.7 per cent, and global fixed income
will increase slightly to 5 per cent.
In the local market, where the NPS
is by far the biggest investor, the fund
has for years been urged to use its
weight to force governance improve-
mentamong thechaebol,family-owned
conglomerates that dominate Korean
business.
Now, as the fund ramps up for a bigger
footing offshore, it also faces pressure to
catch up with international trends
towards ethical investing.
Mr Kim said the NPS planned to
follow the broad direction of peers
in its approach, and would draft an
“exclusion list” of areas in which it
would not invest.
It is reviewing its holdingsin Japanese
companies potentially involved in
crimes during Tokyo’s rule of Korea.
Additional reporting by Song Jung-a and
Kang BuseongFinancials
Korea pension fund in overseas push
Pressure to boost pool of
money as population ages
prompts ‘drastic’ changeROBERT SMITH AND CYNTHIA O’MURCHU
LONDONItalian lingerie makerLa Perlasuffered
falling sales in its first year under the
ownership of German financierLars
Windhorst, according to newly pub-
lished accounts.
Mr Windhorst, a controversial busi-
nessman with a history of legal trouble,
bought the lossmaking La Perla
in February 2018 fromSilvio Scaglia, an
Italian entrepreneur and formercourt
adversary.
La Perla’s accounts show that the
company booked a €91m operating loss
last year, an improvement over the
€179m loss in 2017, but the group’s reve-
nues fell nearly €28m to €106m.
The declining revenues and contin-
ued operating losses are a far cry from
the rosy projections Mr Windhorst pre-
sented to potential investors whenpitching a €500m bond sale from La
Perla last year.
An April 2018 business plan seen by
the Financial Times predicted that the
company would book €169m of sales by
the end of the year, at a 68 per cent gross
margin of €115m. Instead La Perla made
a gross margin of just €43m, or 41 per
cent, on its €106m of revenues in 2018.
The presentation also predicted that
the company would have positive earn-
ings before interest, tax, depreciation
and amortisation in 2018, a target it has
not yet achieved.
A spokesperson for La Perla Fashion
Holding said it was now targeting posi-
tive ebitda in 2020, along with €130m of
sales that year. It is then targeting
€200m sales in 2022.
“Over the past 18 months a new man-
agement team have been overseeing a
restructuring of the business,” said thespokesperson. “The benefits of the
actions they have undertaken are
apparent.”
The accounts from La Perla’s Dutch
holding company, which Mr Wind-
horst controls, reveal it acquired
the lingerie maker from Mr
Scaglia for a “bargain” price of
€1, although he could receive
an earn-out payment if the
business is sold again.
However, a spokesman for
Mr Windhorst’s investment
companyTennor Holdingsaid:
“We categorically deny we
paid only €1. We paid
a significant dou-
ble digit million
euro amount to
the seller of La
Perla.”“This included the repayment of
existing shareholder loans and a com-
mitment to provide funding of at least
€100m during the first 12 months of
ownership. In addition, there was a
further staggered purchase price
commitment made to the
seller.”
La Perla’s Dutch auditor FSV
warned that there was
“material uncertainty” for
the business to continue as a
going concern, as its operations
“depend on continuing finan-
cial support and fund-
ing” from its
shareholder.
Mr Wind-
horst has
come under
renewedscrutiny in recent months due to the tra-
vails of one his biggest backers, London-
basedH2O Asset Management. The
fund manager saw clients withdraw
€8bn from its funds after the FT
revealed the scale of its exposure to illiq-
uid bonds related to the financier.
H2O and its parent companyNatixis,
the French bank, have both specifically
flagged the asset manager’s investment
in La Perla’s bonds to defend its portfolio
of investments linked to Mr Windhorst.
H2O has also flagged a trip its staff made
to La Perla ’s headquarters in Bologna as
evidence of the due diligence it did.
H2O’s fund filings show that the asset
manager had bought more than €300m
of La Perla bonds by the end of 2018.
H2O declined to comment.
Additional reporting by Hannah Roberts
in RomePersonal & household goods.Business plan
La Perla sales slide in first year under Windhorst
Falling revenue and continued
operating losses a far cry from
financier’s rosy projections
A model
prepares
backstage
before a La Perla
show. Lars
Windhorst,
right, bought
the group in
February 2018
Brendan McDermid/ReutersThe lingerie maker made
a gross margin of just
€43m, or 41%, on €106mof revenues in 2018
‘The home bias situation
is very serious’
Kim Sung-joo,
National Pension Service$578bn
Value of assets
managed by South
Korea’s National
Pension Service30 %
Target for share of
global equities in
the fund’s portfolio,
up from 20%
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