The U.S. Small Business Administration, facing criticism for a slowdown in licensing times in the Small Business Investment Company program, is working on a series of fixes to improve the efficiency of the process.
The SBIC program, which provides government-backed leverage for GPs that invest in equity and debt of qualifying small businesses, has broad bipartisan support as a cost-effective way to help small businesses and spur economic growth.
But investment professionals have been frustrated by the recent administration of the program, complaining that long wait times for SBIC licenses have made the program less appealing to both GPs and their LP investors.
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Large public pensions are always on the lookout for new talent and smaller managers, and the CIOs of four large pension systems recently shared advice to firms looking to break in.
The CIOs of the $151 billion Florida State Board of Administration, the $150 billion Teacher Retirement System of Texas, the $120 billion New York State Teachers’ Retirement System, and $28 billion Texas Employees’ Retirement System discussed their approaches to finding new managers at Texas Teachers’ annual emerging manager conference on February 7.
While each pension fund had its own policies, some common themes that emerged included the importance of specialization, the need for patience, and a sharp focus on returns.
All four CIOs said emerging managers need to punch above their weight if they’re going to catch a pension fund’s attention.
“It’s well-established in the academic literature that small or newer managers, for whatever reason – hunger, motivation – tend to produce some pretty persistent alpha over the years,” Florida SBA’s Ash Williams said.
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Blackstone Group’s private equity head, speaking at a recent Oregon pension meeting, said the frenzy for middle-market private equity deals has made the larger end of the market relatively more attractive than ever.
While many LPs are skeptical of megafunds’ ability to continue to provide top-tier returns, Blackstone’s Joseph Baratta said many “unloved” large companies or overlooked divisions of companies are good bets for the type of operational improvements that only a firm like Blackstone can provide.
“We think that the large end of the market is relatively more attractive today than it has ever been,” Baratta said.
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While many investors are frustrated with high prices on secondary private equity assets, Commonfund still sees value in overlooked corners of the market.
The market for secondary transactions, which Evercore recently reported grew a third to $72 billion in 2018 from $54 billion in 2017, is playing an increasingly important role in investors’ PE strategies. Commonfund, which manages $24.1 billion in endowment and foundation assets, tries to stay a step ahead by looking for opportunities in venture capital, emerging markets, and other areas where competition is less heated and prices are lower.
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The government’s small business investment company program is losing some of its luster among managers as long licensing times and the recent government shutdown hamper LPs’ ability to reliably deploy capital to government-backed small-business funds.
GPs and LPs alike complained to Buyouts about long wait times for SBIC licenses – and that was before the government shutdown worsened the backlog at the U.S. Small Business Administration. Most say SBICs still offer attractive opportunities for investment, but many are concerned that the program is trending in the wrong direction.
Attorney Mark Kromkowski, head of McGuireWoods’ SBIC Fund Formation and Transactional Group, said approvals that used to take six months now commonly take a year or more. While some delay should be expected whenever a presidential election leads to turnover of key SBA staffers, the transition between the Obama administration and the Trump administration had unexpected slowdowns, especially for a program that is popular with both Republicans and Democrats, Kromkowski said.
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A panel of experts offered feedback on California Public Employees’ Retirement System’s plan to create a long-duration captive private equity fund, saying long-term or permanent investments could add value but would have lower returns than traditional PE.
The $346 billion pension has proposed a new investment model that would create two CalPERS -controlled PE funds, Horizon and Innovation. If approved, the Horizon fund would invest long term in large “core economy” companies, while Innovation would focus on late-stage investments in life sciences, healthcare, and tech.
Experts invited to speak at CalPERS’ January offside board meeting gave mixed feedback on the Horizon proposal.
“One of the things that gets a little lost in this discussion of long-term investing is there aren’t that many companies that you know when you buy them that you’d like to hold them for 20 years,” said TPG’s Jonathan Coslet.
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Long-dated private equity funds appeal to investors who dislike the constant churn of typical PE funds, but Commonfund isn’t convinced that evergreen funds’ returns will measure up over the long haul.
Large public pensions say long-dated PE funds can match their long-term liabilities better than traditional funds with 10-to-12 year terms. New York’s retirement plan recently committed $500 million to Vista’s perennial fund, and CalPERS is going a step further, planning its own perpetual investment vehicle for long-term ownership of “core economy” companies.
Commonfund, which manages $24.1 billion in endowment and foundation assets, says those types of funds offer more convenience than returns.
“I’m not a huge fan of long-dated funds,” Commonfund Capital President and CEO Peter Burns said. “[Very few companies] can sustain an edge in whatever they do for 20 years. They may have a great company with great products and great margins, but 15 years later the game may have changed completely, with new technology and new competitors.”
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Private equity is one of the most popular investment strategies with large public systems in the U.S., based on how many institutions are boosting their target allocations to the asset class. But several large systems will be looking to do more than passively invest: many want a piece of direct deal action.
Co-investments are seen as an attractive way to reduce fees and allocate more capital, but access to direct deal flow is not always easy to get. LPs that take a more active role can be more effective partners for GPs, but they will need resources and governance structures that allow them to act decisively to approve and pay for deals, according to Brian Gildea, head of investments at Hamilton Lane.
“Big LPs really want to have more of a voice in terms of something that is more customized to their needs, rather than placing their assets in a blind-pool fund,” Gildea said.
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Andres Saenz, whom EY just named global head of its PE business, sees a blurring of the lines between LPs and GPs and wants to position the firm to take advantage.
“We are already seeing tighter collaboration between our GPs and LPs,” Saenz said. “You look at pension funds getting involved in direct investing. You see corporates with their own captive investment arm, in a way mirroring what a private equity firm does. We think of them as people we can potentially help and advise.”
Check out the full article, as published by PE Hub: https://bit.ly/2IlwQZu