The Economist - USA (2022-02-26)

6 SpecialreportPrivatemarkets TheEconomistFebruary26th 2022

ings,however,itisatitshighestrelativetoebitdafortwodeca­

des.Overfour­fifthsoftheAmericanbuy­outmarketisleveraged

morethansixtimesearnings,thelevelatwhich“Federalregula­

torsstarttoraiseeyebrows,”saysBain&Company.

Dealmakerssaypriceslookhighonlybecauseacquisitionsof­

ferfast­growing,notjust dependable,earnings.Theysaythey

havelargelygivenupfinancialengineering,whenthegamewasto

buy unexcitingfirms withsteady cashflows,leverageup and

squeezeoutjuicyreturnsbeforesellingthemon,andembracedan

operationalversion.Theaimistobuyandimprovegoodcompa­

nies.pefirmshavehiredspecialistfixer­uppers.kkrsaysithas

three“supportingcolleagues”,steepedinmarketingstrategy,em­

ployeeengagement,regulatoryriskandmuchelse,foreveryport­

foliomanagerinNorthAmerica.“Thebuy,fireandsellimageof

theindustryissofarfromwhatwedo,”saysMrGray.

Sotoo,hesays,ispe’sreputationforindifferencetoenviron­

mentalconcerns.Thebigfirmstalkup“greentech”andtheenergy

transition.Someputmoneywheretheirmouthsare:Toronto­

basedBrookfieldAssetManagementhasraiseda $15bn“Transi­

tionFund”.InSeptembera groupofinvestorsandpefirms,in­

cludingBlackstoneandCarlyle,launchedaninitiativetostand­

ardiseenvironmental,socialandgovernance(esg) reportingin

buy­outs.Someembraceotherformsofstakeholderism:kkris

championingemployeeownership.AtIngersollRand,a machin­

eryfirm,16,000workershavebeengivenequity.kkrclaimsthis

hashelpedproducea meaningfulimprovementincompanyper­

formance,includingan80%declineinthevoluntaryquitrate.

Goinggreen,too

Investors,knownaslimitedpartners(lps),wantmoreofthis.Ina

recentsurveybyCollerCapital,56%ofEuropeanlps saidesghad

playeda roleinrejectingfundcommitmentsovertheprevious

year.(Americaisbehind,at25%.)Severalinvestorsexpressopti­

mismthatpefirmscantakea leadongreeningbusiness.“Ifthey

seeit asgoodforthebottomlinelong­term,theycanmovequickly

becauseofthepowertheyhaveovertheirportfoliocompanies,”

saysTillyFranklin,CambridgeUniversity’schiefinvestmentoffi­

cer.Yetplentyofpefirmsremaininterestedin“brown”assetsat

theright price. Some are buying oil companiesand sniffing

aroundcoalminesthatpubliclylistedoperatorswanttodivest.

Astheindustryembraceschange,itisalsolookingfornew

typesofinvestors.MrGraytalksof“arevolutionnotjustinwhat

wedobutwhowedoitfor”.Largeinstitutionswillbeitsbiggest

clientsformany yearsto come, but privatefundsare keenly

searchingoutretailinvestorsaswell.Thatwoulddeepenthepool

ofcapitalthatcouldbetappedbya cool$50trn,reckonsBain.“Re­

tailhasbeentheholygrailofprivatemar­

ketssinceSteveSchwarzmangotoutofthe

advisorybusinessa generationago,”says

oneindustryveteran.

Thepegiantsarehustlingforhigh­end

retailbusinessfromclientswhocountas

“accredited” investors whom regulators

deemsophisticatedenoughtobuyprivate

assets.Thebigfirmsarealsostrengthening

private­wealth teams, in some cases

poachingfrombanks.AlisaWoodofkkr

saysthefirmislookingtoraisea thirdormoreofitscapitalfrom

retailinvestors.Apolloexpectsindividualsandadviserstoinvest

$50bnoverthenextfiveyears.Tothatend,inDecemberApolloac­

quiredpartofGriffinCapital,a LosAngeles­basedfundmanager.

Thenexttargetisthe“massaffluent”,ormerelyquitewelloff,who

havelittleinvestedinprivatemarketsandwantmore.Several

firms,includingBlackstoneandBrookfield,havelaunchedorare

workingonpe, credit,propertyorinfrastructurefundstailoredto

smallerinvestors.

Onedifficultyoverturningthisretailtrickleintoa floodisilli­

quidity.Retailinvestorswanttotradeinandoutofinvestmentsat

a reliablenetassetvalue,if notdailythenweeklyormonthly.That

isnoteasytoengineerwithprivateassets.Someatthecutting

edgearemakingheadway.Swiss­headquarteredPartnersGroup

managesover$36bninopen­endedpefundsforinvestorsinclud­

ingwealthyretailclients.Investorsreceivemonthlynetassetval­

uesandcanredeemat30­90days’notice(thoughfundscanhalt

redemptionsduringmarketturmoil).Anotherbarrierisregula­

tion.Rule­settershavelongbeenqueasyaboutthrowingprivate

marketsopentomom­and­popinvestors.

Therearesignsthatregulatoryresistanceissoftening.Last

yeara panelconvenedbyAmerica’sSecuritiesandExchangeCom­

mission(sec) backedgivingretailinvestorsgreateraccesstopriv­

atemarketsaslongastherewereinvestorprotections.America’s

DepartmentofLabouralsoopenedthedoorfordefined­contribu­

tion(dc) pensionplanstoinvest(defined­benefitplanshavelong

doneso).InNovembertheBritishgovernmentproposedrais

theceilingonthefeesthatdcplanscanpay.If enacted,thiswo

allowthemtoinvestinunlistedassets.

Theretailpushaimsbothtoincreaseclientsandtogrow

basedrevenues.Thisgoeshandinhandwiththeobjectiveofrais­

ingmore“perpetual”capital.Notonlyareprofitsfromtraditional

pefundserratic,butalsothefundshavetobewoundup,typically

aftertenyears.Bigfirmswanttomoveawayfromthishere­today­

sold­tomorrowmodel.Theylikevehiclesthatcaninvestforlon­

ger,orareopen­ended,avoidingtheneedtogocapinhandtoin­

vestorseveryfewyears.MrGrayhassaidthatlong­termcapital

“allowsustobroadenwhoweserveandwherewecaninvest.

We’vecomparedthistoa shipmovingfroma narrowchannelinto

openwaters,andwebelievethisprocesshasjustbegun.”

Similarthinkingunderlieseffortstotaplong­terminsurance

poolsofcapital,accordingtoDecMullarkeyofslcManagement.

Bigfirmshavesteppeduptheirpurchasesofbooksofannuitiesor

lifeinsuranceonwhichinsurersarestrugglingtomakea return

becauseoflowinterestrates.Thetypicalpeinvestoracquiressuch

booksfortheirfeeincome,thenbringsdowncostsandsprucesup

theirassetmix.Someofthisisdoneusingprivate­creditmarkets,

wherespreadsarehigherthaninpublicmarkets.“Weonlyneedto

earn 50 basispoints[halfa percent]overwhattheannuitypays

outtodonicely,”saysoneinvestor.

Apollohaspushedfurthestintoinsurance.ItsetupAthene

Holdingin 2009 tobuyannuityblocks,laterfloatingitsshares.It

hassinceacquiredstakesinotherinsurers.Today,Athenemakes

uparound40%ofApollo’stotalassets.kkrisdoingsomething

Bigger, riskier

United States

Source:Bain& Company *Debtasa multipleof 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

x-7x

Less than x

The retail push

aims both to

increase clients

and to grow

fee-based

revenues