Hope your week went well. How are things looking out there? One thing we’ve noticed here is that activity has slowly picked back up, whether we’re talking about deal processes or fundraising (not that fundraising slowed all that much in the downturn).
Do you believe that, despite activity starting to return, we’ll see the usual summer lull, or will this summer be extraordinarily busy as folks make up for the “lost” months of March, April and May?
Real Life: Here’s a real life example of the denominator effect at work. Iowa’s public pension system’s exposure to private equity ramped well beyond its policy caps as the value of its total fund dropped in the downturn.
Iowa Public Employees’ Retirement System total assets dropped from around $36 billion in 2018 to $31.6 billion as of March 31, 2020, according to documents. The system’s actual private equity allocation rocketed to 17 percent of total assets, breaching its 11 percent target, according to pension documents.
Iowa’s investment staff believed the allocation would come back into balance as public markets recovered, bumping the value of the total fund. This in turn would then shrink the percentage private equity represents out of the total fund.
This imbalance occurs because of a phenomenon known as the denominator effect. Back in the global financial crisis, LPs feared the denominator effect in part because the allocation imbalance was prolonged as the crisis stretched from 2008 through 2009 and LP institutions had to adjust policy levels, including by selling private equity stakes on the secondary market.
Now days, LPs seem less concerned about denominator effect. Iowa staff, for example, didn’t seem that concerned with the imbalance.
Systems set allocation targets – the amount of the total fund that goes to private equity – after much study and debate. These targets allow public systems to precisely configure their investment portfolios to hit certain performance targets necessary to ultimately fund the retirements of beneficiaries.
“For LPs bound by a set PE allocation, a sharp denominator effect can inhibit new investment, at least temporarily,” wrote Hugh MacArthur, Graham Elton and Brenda Rainey of Bain & Co in an April report.
Read my story here on Buyouts.
L’Oréal is buying skincare company Thayers Natural Remedies in a process that moved through the downturn, writes Sarah Pringle on PE Hub. The deal is valued at about $400 million, Sarah said. The process began earlier this year with Whipstitch Capital, an independent M&A adviser focused on the consumer market. Lazard advised L’Oréal on the deal, Sarah writes. Check it out here on PE Hub.
RedBird Capital Partners, led by ex-Goldman Sachs executive Gerry Cardinale, raised nearly $1.2 billion for its third growth equity fund, which is targeting $1.7 billion, Kirk Falconer writes on Buyouts today. Cardinale formed RedBird after a 20 year career at Goldman Sachs, which he left in 2012. Check it out here.
Have a great weekend! Hit me up as always with tips n’ gossip, feedback or just to chat at email@example.com, on Twitter or find me on LinkedIn.