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Editor’s Letter: LPs navigate through high-priced environment

  • ADIA moves to more principal investing
  • CalSTRS focuses more on middle market, growth focused managers
  • Largest commitment to Olympus Partners

Activity in private equity hasn’t stopped despite the high-priced environment and warnings that recent vintage funds could be weak performers.

At a time of sky-high prices, GPs are raising money at a pace they did in the peak years of 2007 and 2008. Ironically, it’s a fundraising market full of the best managers in the business raising not only their flagship funds but also new products around credit and smaller-market strategies.

The old “high valuations, too much money in the market” trope has been trotted out repeatedly by consultants, GPs and LPs for a while now. This perspective seems to be a way of preparing the market for an era of lower returns than what is expected out of private equity for these latest vintage funds.

A couple large LPs recently outlined how they’re dealing with the aggressive market these days.

Abu Dhabi Investment Authority, which recently published its 2017 annual report, said increased competition for deal flow and high valuations point to falling PE returns for 2018 and beyond.

But ADIA believes it is positioned for this market through its increasing focus on region and sector, which enables it to assess relative value of investments across geographies and capital structures, my colleague Preeti Singh reports.

The sovereign fund’s sector focus is financial services, healthcare, industrials, tech and consumer and by geography it looks at Americas, Europe, Middle East, Asia and Asia-Pacific, Singh reported.

ADIA plans to continue increasing its sector-led principal investment activity, as it becomes more of a direct investor and less of a passive LP.

The fund also will attempt to navigate the high-priced environment by “evaluating structured equity opportunities, defensive industries and less correlated investments across the private asset spectrum, with a particular focus on identifying relative value across geographies and capital structures.”

In the U.S., California State Teachers’ Retirement System committed as much money to 2017 vintage funds than it has since before the global financial crisis.

CalSTRS also ramped up its PE commitment activity in the year preceding the global financial crisis in 2008. CalSTRS committed more than $14.5 billion to funds raised in 2006 and 2007, more than any other two-year period since the program’s inception in 1988, we recently reported.

More recently, CalSTRS has been moving away from megafunds and backing funds targeting the middle market and growth equity. CalSTRS last year committed to growth equity and middle- market funds raised by firms like Francisco Partners, Summit Partners and Valor Equity Partners. Its largest commitment was a $350 million allocation to Olympus Partners’ new $3 billion growth fund.

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky