The Economist (2022-02-26) Riva

6 SpecialreportPrivatemarkets TheEconomistFebruary26th 2022

ings,however,itisatitshighestrelativetoebitdafortwodeca-

des.Overfour-fifthsoftheAmericanbuy-outmarketisleveraged

morethansixtimesearnings,thelevelatwhich“Federalregula-

torsstarttoraiseeyebrows,”saysBain&Company.

Dealmakerssaypriceslookhighonlybecauseacquisitionsof-

ferfast-growing,notjustdependable,earnings.Theysaythey

havelargelygivenupfinancialengineering,whenthegamewasto

buyunexcitingfirmswithsteadycashflows,leverageupand

squeezeoutjuicyreturnsbeforesellingthemon,andembracedan

operationalversion.Theaimistobuyandimprovegoodcompa-

nies.pefirmshavehiredspecialistfixer-uppers.kkrsaysithas

three“supportingcolleagues”,steepedinmarketingstrategy,em-

ployeeengagement,regulatoryriskandmuchelse,foreveryport-

foliomanagerinNorthAmerica.“Thebuy,fireandsellimageof

theindustryissofarfromwhatwedo,”saysMrGray.

Sotoo,hesays,ispe’sreputationforindifferencetoenviron-

mentalconcerns.Thebigfirmstalkup“greentech”andtheenergy

transition.Someputmoneywheretheirmouthsare:Toronto-

basedBrookfieldAssetManagementhasraiseda$15bn“Transi-

tionFund”.InSeptemberagroupofinvestorsandpefirms,in-

cludingBlackstoneandCarlyle,launchedaninitiativetostand-

ardiseenvironmental,socialandgovernance(esg)reportingin

buy-outs.Someembraceotherformsofstakeholderism:kkris

championingemployeeownership.AtIngersollRand,amachin-

eryfirm,16,000workershavebeengivenequity.kkrclaimsthis

hashelpedproduceameaningfulimprovementincompanyper-

formance,includingan80%declineinthevoluntaryquitrate.

Goinggreen,too

Investors,knownaslimitedpartners(lps),wantmoreofthis.Ina

recentsurveybyCollerCapital,56%ofEuropeanlpssaidesghad

playedaroleinrejectingfundcommitmentsovertheprevious

year.(Americaisbehind,at25%.)Severalinvestorsexpressopti-

mismthatpefirmscantakealeadongreeningbusiness.“Ifthey

seeitasgoodforthebottomlinelong-term,theycanmovequickly

becauseofthepowertheyhaveovertheirportfoliocompanies,”

saysTillyFranklin,CambridgeUniversity’schiefinvestmentoffi-

cer.Yetplentyofpefirmsremaininterestedin“brown”assetsat

therightprice.Somearebuyingoilcompaniesandsniffing

aroundcoalminesthatpubliclylistedoperatorswanttodivest.

Astheindustryembraceschange,itisalsolookingfornew

typesofinvestors.MrGraytalksof“arevolutionnotjustinwhat

wedobutwhowedoitfor”.Largeinstitutionswillbeitsbiggest

clientsformanyyearstocome,butprivatefundsarekeenly

searchingoutretailinvestorsaswell.Thatwoulddeepenthepool

ofcapitalthatcouldbetappedbyacool$50trn,reckonsBain.“Re-

tailhasbeentheholygrailofprivatemar-

ketssinceSteveSchwarzmangotoutofthe

advisorybusinessagenerationago,”says

oneindustryveteran.

Thepegiantsarehustlingforhigh-end

retailbusinessfromclientswhocountas

“accredited”investors whomregulators

deemsophisticatedenoughtobuyprivate

assets.Thebigfirmsarealsostrengthening

private-wealth teams, in some cases

poachingfrombanks.AlisaWoodofkkr

saysthefirmislookingtoraiseathirdormoreofitscapitalfrom

retailinvestors.Apolloexpectsindividualsandadviserstoinvest

$50bnoverthenextfiveyears.Tothatend,inDecemberApolloac-

quiredpartofGriffinCapital,aLosAngeles-basedfundmanager.

Thenexttargetisthe“massaffluent”,ormerelyquitewelloff,who

havelittleinvestedinprivatemarketsandwantmore.Several

firms,includingBlackstoneandBrookfield,havelaunchedorare

workingonpe,credit,propertyorinfrastructurefundstailoredto

smallerinvestors.

Onedifficultyoverturningthisretailtrickleintoafloodisilli-

quidity.Retailinvestorswanttotradeinandoutofinvestmentsat

areliablenetassetvalue,ifnotdailythenweeklyormonthly.That

isnoteasytoengineerwithprivateassets.Someatthecutting

edgearemakingheadway.Swiss-headquarteredPartnersGroup

managesover$36bninopen-endedpefundsforinvestorsinclud-

ingwealthyretailclients.Investorsreceivemonthlynetassetval-

uesandcanredeemat30-90days’notice(thoughfundscanhalt

redemptionsduringmarketturmoil).Anotherbarrierisregula-

tion.Rule-settershavelongbeenqueasyaboutthrowingprivate

marketsopentomom-and-popinvestors.

Therearesignsthatregulatoryresistanceissoftening.Last

yearapanelconvenedbyAmerica’sSecuritiesandExchangeCom-

mission(sec)backedgivingretailinvestorsgreateraccesstopriv-

atemarketsaslongastherewereinvestorprotections.America’s

DepartmentofLabouralsoopenedthedoorfordefined-contribu-

tion(dc)pensionplanstoinvest(defined-benefitplanshavelong

doneso).InNovembertheBritishgovernmentproposedrais

theceilingonthefeesthatdcplanscanpay.Ifenacted,thiswo

allowthemtoinvestinunlistedassets.

Theretailpushaimsbothtoincreaseclientsandtogrow

basedrevenues.Thisgoeshandinhandwiththeobjectiveofrais-

ingmore“perpetual”capital.Notonlyareprofitsfromtraditional

pefundserratic,butalsothefundshavetobewoundup,typically

aftertenyears.Bigfirmswanttomoveawayfromthishere-today-

sold-tomorrowmodel.Theylikevehiclesthatcaninvestforlon-

ger,orareopen-ended,avoidingtheneedtogocapinhandtoin-

vestorseveryfewyears.MrGrayhassaidthatlong-termcapital

“allowsustobroadenwhoweserveandwherewecaninvest.

We’vecomparedthistoashipmovingfromanarrowchannelinto

openwaters,andwebelievethisprocesshasjustbegun.”

Similarthinkingunderlieseffortstotaplong-terminsurance

poolsofcapital,accordingtoDecMullarkeyofslcManagement.

Bigfirmshavesteppeduptheirpurchasesofbooksofannuitiesor

lifeinsuranceonwhichinsurersarestrugglingtomakeareturn

becauseoflowinterestrates.Thetypicalpeinvestoracquiressuch

booksfortheirfeeincome,thenbringsdowncostsandsprucesup

theirassetmix.Someofthisisdoneusingprivate-creditmarkets,

wherespreadsarehigherthaninpublicmarkets.“Weonlyneedto

earn 50 basispoints[halfapercent]overwhattheannuitypays

outtodonicely,”saysoneinvestor.

Apollohaspushedfurthestintoinsurance.ItsetupAthene

Holdingin 2009 tobuyannuityblocks,laterfloatingitsshares.It

hassinceacquiredstakesinotherinsurers.Today,Athenemakes

uparound40%ofApollo’stotalassets.kkrisdoingsomething

Bigger, riskier

United States

Source:Bain&Company *Debtasamultipleof EBITDA

100

75

50

25

0

2003 201510

EV/EBITDApurchase-price

multiplesforbuy-outs,%

Greater

than11x

9x-11x

7x-9x

Lessthan7x

100

75

50

25

0

2003 201510

Buy-outs, by leverage level*, %

Greater than 7x

6x-7x

Less than 6x

The retail push

aims both to

increase clients

and to grow

fee-based

revenues