Why are sovereign funds doing their own private equity deals?
london — Some of the world’s biggest sovereign wealth funds are increasingly striking their own private equity deals rather than relying on external fund managers, in a drive to cut costs and gain more control.
With some $6.5 trillion in assets, sovereign investors already account for 19 per cent of capital committed to private equity, according to data from research firm Preqin.
But mega-funds such as the Abu Dhabi Investment Authority, Saudi Arabia’s Public Investment Fund and Singapore’s GIC are hiring specialists to find or vet deals — enabling them to negotiate with private equity firms from a position of strength or to go it alone.
In 2012, sovereign investors participated in just 77 direct private equity deals. By 2016, that had risen to 137, Thomson Reuters data shows. Deal value more than trebled to $45.2 billion from $14.8 billion.
For target companies it could mean longer-term investors with deeper pockets. Private equity funds typically look to sell within three to five years, but sovereign funds often an take investment view stretching over decades.
The trend is driven partly by a need to work assets harder as returns shrink, and partly by a conviction that only through originating or structuring deals themselves can sovereign funds get what they want.
“It’s a natural evolution. If you do it yourself, you not only reduce the fees, you get greater control over the pricing of the deal,” said Babak Nikravesh, a San Francisco-based partner at law firm Hogan Lovells, who represents sovereign investors.
This allows funds to better protect their interests when markets go south. One sovereign investor who spoke on condition of anonymity said that during the global financial crisis, some external funds behaved irrationally.
“They had different liability streams than us, so they were under pressure to sell at a time when they should have been investing more,” the source said. “Going more direct means you don’t have to worry about whether your interests are aligned with other investors’.”
Some funds still rely on private equity funds to find deals and commit capital on their behalf, but not many can take the amount of capital the sovereign investors want to commit. There is also growing disenchantment with the industry’s traditional two per cent management fee and 20 per cent performance fee model. A Preqin survey found 39 per cent of institutional investors polled in December 2016 cited fees as one of the key challenges facing the industry, up from 19 per cent in 2015.
“The fees are very high and swallow a large chunk of the returns, so there is a big desire to look at how can they do this more efficiently,” said Elliot Hentov, head of policy and research in the official institutions group at State Street Global Advisors. —