Good morning, dealmakers.
MK Flynn here with the Wire.
The challenges facing the private equity industry are becoming increasingly complex.
One sign of the times: Carlyle reported Q1 earnings earlier this morning, and they were weaker than expected.
“We are in the midst of one of the most complex financial markets in recent memory, which is clouding the near-term outlook and impacting market sentiment,” Carlyle CEO Harvey Schwartz said in a statement.
The former Goldman Sachs president continued: “I’m confident in the long history of our global firm in successfully investing through all cycles, and fully expect Carlyle to continue to expand and diversify our platform to drive shareholder value over the long term.”
More regulations are adding complexity too. Yesterday, the SEC voted to adopt new rules for the Form PF. We explore how the move affects private equity firms, below.
On a more upbeat note, we’ll end the Wire today with a profile of prolific software investor Hg.
Before we dive into those stories, let’s take a quick look at a pair of deals OEP just announced this morning.
Robust growth
One Equity Partners, a middle-market PE firm headquartered in New York, has completed the acquisitions of Kirey Group, an Italian IT systems integrator and technology developer, and Synergyc, a Bulgarian IT services provider.
The acquisition of Synergyc aims to add IT service workflow automation and CRM/ ERP consulting capabilities to Kirey Group.
“The simultaneous combination of Kirey Group with Synergyc creates a new player of scale in the market that is primed to benefit from robust growth within European IT services, a rapidly growing market driven by the adoption of various technologies supporting remote working and the continued digitization of business processes,” said Joerg Zirener, senior managing director, OEP.
‘More is not always better’
Yesterday, the SEC adopted new Form PF rules, as regulators took the first step toward reimagining private fund policy.
For analysis, we turn now to Regulatory Compliance Watch’s Bill Myers.
Bill writes:
US Securities and Exchange Commission Chairman Gary Gensler promised to reimagine America’s private fund regime. More than a year later, he’s opened a new phase of that project by convincing the world’s most powerful financial regulator to impose new emergency reporting requirements that he says will help his agency ward off systemic crises.
Registered private equity fund sponsors will have 60 days from the end of each quarter to report GP-led secondaries deals, the removal of a general partner, investor-led liquidations or other “termination events” under new Form PF rules adopted by a divided SEC at its open meeting on Wednesday.
The new rules will also require large, registered private equity advisers – those with at least $2 billion in assets under management – to report any GP or limited partner claw- backs at least once per year and to provide more information about their fund strategies and debt loads on the revised Form PF.
The rules had been pending since early last year. In some ways, they offer compromises with the industry: the proposal had originally put set some hedge fund reporting deadlines at “one business day”; it had defined “large” private equity funds as those with at least $1.5 billion in AUM; and it had proposals for reporting by large liquidity funds. Those proposals didn’t make the final rule. In another way, though, the SEC isn’t backing off any of the broader principles behind the rulemaking notice. Commission officials say they need better visibility into the $25 trillion private funds industry to ward off systemic risks.
“The commission’s experiences with recent market events,” regulators said in a fact sheet accompanying the rules, referring to the collapse of Silicon Valley Bank and its knock-on effects, “have highlighted the importance of receiving current and robust information from market participants.”
The new Form PF rules are merely the beginning. Still pending is yet another Form PF overhaul, in partnership with the Commodity Futures Trading Commission, and a huge rulemaking notice that would ban a host of private fund fees. Gensler has said repeatedly his reforms have two goals: the first is to shrink investment adviser fees; the second is to protect the millions of ordinary Americans whose pension funds prop up the private fund industry.
“Look, history is replete with times when one corner of the financial system… spills out into the broader economy,” Gensler said in voting for the new rules. “And when that happens, everyday Americans – bystanders on the highway of the economy – get hurt. Private funds also have evolved significantly in their business. Private funds today are ever more interconnected with the markets. It makes the visibility into these funds ever more important.”
The vote result drew criticism from lobby group the Managed Funds Association, with president and chief executive Bryan Corbett saying it was disappointing the SEC did not move both Form PF proposals together to help reduce the implementation burden on managers.
“While alternative asset managers do not pose systemic risk, we are sympathetic to efforts seeking to monitor risk throughout the financial system,” Corbett said in statement. “We appreciate that the SEC has incorporated some of our suggestions, but we are concerned this final rule has the potential to exacerbate stress on funds, harm investors, and increase market volatility without commensurate benefit.”
The new rules came over the objection of the SEC’s Republican Commissioners. “This expansion of Form PF data collection is another demonstration in the Commission’s belief in the benevolent power of more,” Hester Peirce said in voting against the rules. “More is not always better. Private fund managers should spend their time focusing on their risks, not filling out SEC forms.”
For ongoing coverage of the SEC, visit Regulatory Compliance Watch.
Leaky bathtub
Private Equity International’s Carmela Mendoza has an in-depth look at Hg.
The London-headquartered firm’s forte is buyouts of software and services businesses. It is especially dominant in the decidedly niche – and rapidly growing – world of software-as-a-service-enabled businesses that have a high proportion of recurring and contracted revenues from loyal customers, Carmela reports. These revenues are based on products, backed by intellectual property, that are business critical and low spend.
An Hg insider told Carmela that the firm calls this the “leaky bathtub” model. In essence, it’s a revenue model analogy, where most companies Hg owns start each year with over 90 percent of revenue already contracted – a feature of the SaaS software business model.
That’s opposed to, for example, a consulting firm that starts each year with 0 percent revenue contracted. “Their businesses are the kinds of software solution that customers can’t really turn off,” the insider says.
Hg has amassed $11 billion for Saturn 3, its latest large-cap offering – more than double the $5 billion accrued by its 2020-vintage predecessor. It also reached the €6.75 billion hard-cap for Genesis 10 in mid-April, it is understood, and is yet to hold a final close. Funds under management have grown to over $55 billion, making it the largest UK-headquartered firm in our 2022 PEI 300 ranking of private equity’s biggest fundraisers over a five-year period.
Hg invests in eight software clusters: enterprise resource planning and payroll; tax and accounting; legal and regulatory; healthcare; insurance; automation and engineering; wealth and markets; and SME services.
Over the past decade, Hg has backed 84 platform investments across software and services.
The firm’s strategy seems to be paying off: Hg has returned around $17 billion of proceeds to its investors at 3.3x or 33 percent IRR as of 31 March 2023, according to a factsheet on its website.
On that note, I’ll sign off for today. Obey Martin Manayiti will be with you on the Wire tomorrow, and I’ll be back on Monday.
Until then, happy dealmaking,
MK
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