Scoops & Analysis

Exit, pursued by bearish Verus

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A researcher dressed in a panda costume puts a panda cub into a box before its physical examination at the Hetaoping Research and Conservation Center for the Giant Panda in Wolong National Nature Reserve, Sichuan province December 3, 2010. The 4-month old cub, the first in the centre to be trained for reintroduction into the wild, is monitored by hidden cameras. Researchers performing physical examinations on the cub wear panda costumes to ensure that the cub's environment is devoid of human influence, according to local media. Picture taken December 3, 2010. Picture taken December 3, 2010. REUTERS/Stringer (CHINA - Tags: ANIMALS SOCIETY IMAGES OF THE DAY) CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA - RTXVG33

Verus recently signaled its bearishness on U.S. buyout funds, citing high prices, reduced use of leverage and the likelihood of diminished returns.

The investment adviser’s report, which it delivered to Fresno County Employees’ Retirement Association earlier this month, lays out the case for why newly christened U.S. buyout funds are unlikely to match the returns generated by previous funds and why limited partners should proceed with caution as they pledge capital to new funds.   

“[There is] downward pressure on buyout returns as managers are paying up for new deals and equity contributions are on the rise,” Verus wrote, noting that the sector is unattractive compared with opportunities in venture capital or global distressed debt.

It’s astute analysis, echoing what I’ve seen and heard from other public pension advisers.

Of course, I seriously doubt that Verus clients would hold off on committing to blue-chip buyout funds anytime soon. The historic returns of behemoths like Thoma Bravo (which had no problems hitting $7.6 billion) or Vista Equity Partners (which will hit its $10 billion hard cap because, I mean, c’mon) are just too good to ignore.

That said, any reticence on the part of its client base — particularly larger institutions — opens up room for LPs looking to get in with some of the industry’s oversubscribed mainstays.

Fresno County’s $102 million PE portfolio is tiny, at least as far as public pensions go, but Verus’s client base also includes institutions like Indiana Public Retirement System and Tennessee Consolidated Retirement System. Both regularly shell out $100 million-plus commitments to PE funds.  

LPs continue to face steep competition in getting their preferred allocations to top-tier funds, even as recent data from Preqin suggests fundraising may be slowing down. When large investors and their advisers start to pull back the reins, it bears mentioning.

As one of my Twitter followers pointed out (slightly edited to account for the tweet’s shorthand): “Verus doesn’t like U.S. private equity? I’ll take its allocations to top-quartile funds then. Please and thank you.”

A researcher dressed in a panda costume puts a panda cub into a box before its physical examination. Photo courtesy REUTERS/StringerÂ