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February 25, 2015
NAIC NEWS
3 Game-Changing Private Equity Industry Trends
Coming back from our Miami SWFI Institutional Investor Forum at the Fontainebleau, which had institutional investor capital from all around the globe, I thought about asset owners and the importance of specialist and emerging private equity firms. The significance of domain expertise and founder involvement, to me, is paramount. At our February forum, in which we partnered with the National Association of Investment Companies (NAIC), a vibrant organization that focuses on emerging and diversely-owned managers, there was broad talk on the advent of specialist managers. Asset owners like Washington State Investment Board (WSIB) and Abu Dhabi Investment Authority (ADIA), are under fiduciary obligations to hit their return targets for their beneficiaries whether they are pensioners, citizens, or the government. The sophistic idea of levering up and praying for a market rebound is not a sound strategy for liability-driven asset owners. When opening up an annual report of a sovereign wealth fund or pension, one can easily see that real estate and private equity management fees are big drivers of investment costs. The question looms: Will something change in the private equity industry? Will generalist firms agree to lower fees? Will specialist firms continue to justify their fees based on performance? The chasm between generalists and sector specialists is widening.
Specialist Private Equity Firms
Partly thanks to global quantitative easing, the desire for high-yielding investments has pushed sovereign wealth funds and pensions toward private equity. Sector specialist private equity firms, with their chosen "major," tend to have a tighter grasp on their domain and exhibit higher discipline when buying or selling companies. To post out-sized returns, institutional investors have sought private equity specialist firms like Texas-based buyout shop Vista Equity Partners, which was founded by Robert Smith and Brian Sheth back in 2000. Vista Equity has bought companies like Misys, Lanyon, Tibco Software and Navex Global. Smith had a fireside chat with Kerry Kennedy of the RFK Center, at our Miami forum, discussing a variety of topics. Part of the discussion focused on Vista Equity's secret sauce, their in-house consulting group, Vista Consulting Group, which trains and enhances the staff of their portfolio companies. Smith commented Vista Equity can, "teach our managers on how to run an efficient software company."
Furthermore, Smith, Sheth and their teams seek to find synergies between their portfolio companies.
Smith likes enterprise software as an industry, he stated, "Enterprise software embeds itself with every industry on the planet."
Being domain experts in enterprise software and data, Vista Equity claims it can maximize returns for their investors by adding value, not just financial leverage (other people's money).
Sovereign Wealth Funds as a Permanent Capital Base
Sovereign wealth funds surpassed the US$ 7 trillion mark before the start of 2015. In a recent earnings call, Carlyle Group Co-CEO David Rubenstein highlighted a shift in the capital base of limited partners. U.S. pensions are slowly making up a smaller proportion of limited partners. Sovereign wealth funds and other foreign institutional asset owners are adding diversity to the mix. Touted numerous times, Rubenstein sees sovereign wealth funds as a significant source of long-term capital, historically making up 17% of the funding source. The percentage as a funding source has moved up to 37%.
Reducing the Number of Private Equity Relationships, Less is More
Increasingly, limited partners are reducing the number of private equity relationships. In late 2013, California Public Employees' Retirement System
(CalPERS) publicly stated they are reducing the number of private equity relationships. In December 2013, CalPERS had 389 private equity managers. The pension investor giant seeks to have a manageable 100 to 150 PE relationships over time. Agreeing to CalPERS is David Neal, managing director of
Australia's Future Fund, which uses around 25 to 30 private equity managers. These asset owner market signals will lead to more mega buyout funds. For example, Blackstone Capital Partners VII, a fund of the Blackstone Group, is seeking US$ 16 billion.
As more money flows into fewer hands of private equity firms, besides performance, firm specialization and marketing to sovereign wealth funds, Asian insurance companies and overseas pensions, will be ways for stuck-in-the-middle private equity firms to prosper in the long-run.
The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org
NAIC MEMBER NEWS
New MainStream Capital Fund II Raises $252 Million
Fund Supported by Leading Institutional and Strategic Investors Exceeds Targeted Size
New York, NY - February 25, 2015 - New MainStream Capital ("NMS"), a private investment firm specializing in strategic equity investments of lower middle market companies in selected growth industries, announced today that it has successfully completed the final closing for NMS Fund II, LP ("NMS II") with $252 million of committed capital. Investors in NMS II consist of leading institutional investors, family offices, and public pension funds. NMS II follows the raise of NMS I which closed in December 2010 with $185 million of committed capital and is now substantially harvested.
NMS II will continue the investment strategy NMS has deployed since its inception. The firm will invest in and partner with management teams in growth industries in three broad domestic sectors including business services, healthcare services, and consumer products and services. NMS will continue to provide strategic insight and operational enhancement to outstanding companies to accelerate growth strategies. NMS II completed its first investment in 2014, partnering with management in a recapitalization of ettain group, inc. ("ettain"), a national IT staffing and IT talent solution company. NMS will provide additional capital to support ettain's future growth through incremental resources, expanded service offerings, and strategic acquisitions.
Kevin Jordan and Martin Chavez, Co-Founders and Managing Partners of NMS, said, "We greatly appreciate the trust and confidence placed in NMS by our NMS II investment partners. The successful fundraising of NMS II was made possible by the invaluable contributions of our partners in NMS I, our Strategic Advisors and Operating Executives, and the outstanding management teams of our portfolio companies. We are very pleased to have met our NMS II objective of partnering with outstanding institutional investors, exceeding our targeted fund size."
NMS was assisted in the formation of NMS II by Evercore as a placement agent and Paul, Weiss, Rifkind, Wharton & Garrison LLP a legal counsel.
About New MainStream Capital
Founded in 2010, New MainStream Capital is a New York and Dallas-based private investment firm specializing in strategic equity investments and leveraged buyouts of lower middle market companies. The Firm was formed through the spin-out of a group of portfolio companies from the Goldman Sachs Merchant Banking Division. NMS focuses on companies headquartered in the U.S. poised to benefit from sustainable growth trends. NMS invests in healthcare services, consumer products and services, and specialized business services industries.
For additional information on NMS, visit the firm's website at www.nms-capital.com.
UPCOMING INDUSTRY EVENTS
NAIC's 45th Annual Meeting & Convention will be held October 5-6, 2015 in New York, NY. Please save the date for this unique event that highlights the performance of diverse and emerging managers and examine best practices in the private equity industry. The agenda will include a diverse lineup of panels, guest speakers, and general sessions that will address significant industry issues, trends, challenges, and opportunities.
Registration will be opening soon.
The 2015 Women's Private Equity Summit, to be held March 11 - 13, 2015 at The Ritz-Carlton, Half Moon Bay, California, will bring together an impressive group of more than 450 private equity and venture capital leaders for two days of high-level discussion and non-stop networking.
Make sure there is a seat for you at this highly interactive, major industry event. Space is limited.
For more information and to register, click the following link: http://www.womensprivateequitysummit.com/register.php
This conference promotes diversity by providing a day of dynamic speakers, educational panels and networking activities, increasing access and career development for more than 350 professionals from backgrounds traditionally underrepresented in the alternatives sector.
The Conference features the insights of prominent leaders from private equity, hedge funds, real estate, limited partners, fund of funds, emerging managers, and career placement firms, while fostering valuable exposure and interaction for participants.
For more information and to register, click the following link: http://www.seoaltinvestments.org/annual-conference/
The AAAIM National Conference is an annual event dedicated to supporting the advancement of AAPIs in the industry. This conference brings together leaders in the industry from some of the largest plan sponsors and investment firms to boutique investment management companies. Don't miss out - secure your space today!
For more information and to register, click the following link: https://www.eventbrite.com/e/aaaim-2015-national-conference-tickets-15607016005
In its 12th Year ConsortiumEAST continues to be the premier gathering of institutional investors with emerging and diverse managers for education and real relationship building. No other forum focused on emerging managers matches our concentration of attendees, action-oriented session content and facilitated networking. Each year our theme correlates to what is most relevant in the EM space. For 2015 our focus is on the Four V's: Vision, Validate, Value and Victory. All four are necessary to building and expanding EM opportunities.
For more information and to register, click the following link: http://www.rgameetings.com/15cEAST/index.php
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