LettersAmericafrom
In this one-off edition, we take a look back at the past year's Letters from America, written by Prosek's Mark Kollar.
Letter from America
What's in a name?
What’s in a name? That which we call a rose by any other name would smell just as sweet. Romeo and Juliet, Act 2, Scene 2
With apologies to William Shakespeare for bringing Juliet’s famous soliloquy into a current American taxonomy debate, apparently a lot seems at stake in the more than multi-trillion-dollar market of ESG investments.
Those three letters, which we all know is shorthand for environment, social and governance, is causing quite a feud in America among those opposed to an ESG framework as a guide for making investment decisions and those in favor of this approach as a way to identify risk and create long-term value.
...it seems that responsible investing in the United States is becoming the preferred way to describe investment strategies focused on climate, governance and people.
The debate intensified and took a semantic turn when Larry Fink, the Chairman and Chief Executive Officer of BlackRock, this summer said that the term ESG itself was not the right way to talk about investment strategies. As expected, big headlines and a chorus of supporters and haters followed. The good news? A real reckoning is underway (at last!) and one in the final analysis needs to focus on what matters at the core: practicing transparency and risk management, creating resilience in a fast-evolving macro environment and conducting good business.
This might all seem like marketing to some extent, but precise language backed by actions is important in any messaging especially when a firm’s narrative must reach a large and diverse group of stakeholders. As a communicator, I get asked by private market clients what is the best way to describe their ESG programs, which until recently have been a positive element of their branding. Some even wonder whether they should talk about it at all or avoid the ESG terms altogether.
So, yes, simply put: Talk about it but find the right balance between promotion and transparency:
• Focus less on the labels and more on the initiatives and actionable progress: Climate and the energy transition are leading the conversation and driving the news cycle. Blackstone just raised its largest green energy credit fund at $7.1 billion. KKR has been expanding in climate investing by adding to its leadership team and its commitments in energy-renewable partnerships. And Carlyle, as a co-chair continues to push forward its ESG Data Convergence Initiative to drive convergence around meaningful ESG metrics for the private equity industry, with more than 325 GPs and LPs representing over $27 trillion in assets.
• Demonstrate good governance: Running a tight ship with a carefully designed leadership structure and succession plan, among other elements, has never gone out of favor.
• Celebrate talent and understand your constituencies: Winning teams reflect their stakeholders and communities. Illustrate stories on entrepreneurship and innovation, both inside and outside the firm especially as they relate to the issues your stakeholders care about.
Since the term ESG surfaced in the early 2000s, packaging what is really responsible and good business into an acronym has led to confusion and opacity, exactly the opposite of its intent. Right now, it seems that responsible investing in the United States is becoming the preferred way to describe investment strategies focused on climate, governance and people. That does not mean the term ESG has been completely discarded as the move to more sustainable investments continues to advance. But at some point, we will likely ask -- ESG, wherefore arte thou -- without ever forsaking a focus on good business.
September 2023
Letter from America
The Eagle Has Landed in the Falcon Economy
It’s no secret that the Americans have come hat in hand to the Middle East to raise money for their private-market funds for some time. In fact, asset managers of all stripes from the US have been making the 12-plus-hour flight from JFK to the Arabian Peninsula for many years, but something has changed since the pandemic to make this part of the world even more attractive for fundraising.
For starters, the energy boom has made the Gulf nations more cash flush than ever. In addition, a rise in interest rates and economic uncertainty, not to mention wobbly geopolitics, has lessened enthusiasm for big bets by allocators. That means Saudi Arabia, the UAE and other Middle Eastern countries are now among the most popular hosts and why Abu Dhabi has been aptly named the Capital of Capital. This is, however, no longer a stop-over trip. Instead, US asset managers are establishing their own offices in the Middle East and no longer staffing them with “representatives.” Investment professionals are setting up operations and hiring for business-development roles. A more efficient regulatory environment and a prime location that links the East and the West make it a strategic location for global managers.
have set up shop in Abu Dhabi alone during the last six-month period ending August 2023, according to the ADGM.
The difference now within this growing population are not just about the numbers. The asset managers coming to the region have the ambition to become a real part of the investment ecosystem, and that is one of the keys to their success. In person meetings are critical in building real long-term relationships throughout the investment community and will pay rewards, local officials say.
...investors, business leaders and innovators are descending on [Abu Dhabi] with schedules and agendas for a month-long run of conferences that promise to bring a brighter global spotlight to the Falcon Economy.
Fast forward to today and investors, business leaders and innovators are descending on the region with more than hat in hand but with schedules and agendas for a month-long run of conferences that promise to bring a brighter global spotlight to the Falcon Economy. These start with FII or “Davos in the Desert” later this month, followed by SuperReturn Middle East, Abu Dhabi Finance Week, Fortune Global Forum, COP 28 and then Milken Middle East, all before year end. That’s quite a line up and one that will allow the region to show their financial acumen and commitment to the energy transition.
In fact, officials from Abu Dhabi Global Markets, Abu Dhabi’s international finance center and home to some of the largest asset managers and sovereign wealth funds, estimate that there are anywhere between 30 to 40 global assets managers setting up offices on the Al Maryah and Al Reem islands, which make up the ever-expanding ADGM. In a breakdown for the alternative-investor market, a total of 102 asset managers – including investment firms and hedge funds that oversee 128 funds –
It’s not uncommon today to see driverless taxis on the streets of Abu Dhabi but following the next few months of visitors from America, the taxi may become electric soon, making frequent stops to US franchise drive ins or maybe even an eagle’s nest or two.
Letter from America
Wall Street Goes for an Oscar, a Grammy and a Pennant
I was one of the millions who saw the Taylor Swift “Eras Tour” film last month, going in knowing just a few of her hits and coming out a Swiftie, like probably so many of us who did not grow up with her.
I also came out with a better understanding on why Wall Street has been falling in love with celebrities on the stage, screen and the playing surface. Big fan bases. Big revenue numbers. And lots of ways to amplify that content for profit.
Let’s take a look: Last year, Ares Management raised $3.7 billion of capital to invest across the capital structure in sports leagues and teams and their related franchises, as well as media and entertainment companies.
help supercharge pitch meetings and conferences.
What’s more, celebrities and especially athletes extend their brand beyond their talents with product endorsements, new product lines, licensing agreements, sports betting, fashion and even music (think Damian Lillard of the NBA and his rap alias Dame D.O.L.L.A.) – with some even putting money where their mouth is by taking on part ownership of major U.S. sports properties (think Tom Brady and his minority stake in the Las Vegas Raiders).
There’s a current arms race for media rights, which can be monetized across economic cycles. And most important and one that will give the biggest wallop -the next frontier is private equity involvement in team ownership.
In addition, Carlyle recently provided an asset-backed credit facility to New Regency, the entertainment company with hits like the movie “Bohemian Rhapsody.” Carlyle Global Credit has deployed more than $3 billion into the sports, media and entertainment industry as demand for content creates more and more opportunities for investors.
Why the mad dash to own a piece of star power? Outside of the obvious reason of ego for some, it comes down to a few basic elements after talking with investors and analysts.
First, these deals produce steady returns, even when interest rates are rising, or when the economic or political outlook is uncertain. Fans are good consumers and are beyond loyal to their limelight heroes. This makes these investments almost recession proof. A popular though unproven adage is that fans would remortgage their house before selling good tickets. Moving to the capital raising side, celebrities can bring in more investors and
And finally, we are in an era where experiences are getting a share of wallet. In fact, Millennials and Gen Zs would rather spend more on experiences over goods by some 72 percent, according to survey data by Harris Poll referenced on a Goldman Sachs Instagram post recently. That trend is expected to continue, and Wall Street is not holding back.
But will this last? Amid some concerns of a pullback in recent months, analysts see a long-term play here. There’s a current arms race for media rights, which can be monetized across economic cycles. And most important and one that will give the biggest wallop -- the next frontier is private equity involvement in team ownership. With most major leagues already greenlighting the idea and the NFL – the last holdout – appearing imminent. Perhaps, Taylor Swift is more prescient than we think as she has taken front row in the Kansas City Chiefs box most Sundays.
Letter from America
Alt Snowbirds Head South as Florida Continues to Become Anything but Alternative
It’s December with winter approaching on the East Coast, which means focus now turns South and often to Florida, a one-time short-term “snowbird” haven for Wall Street, especially along the Palm Beach/Miami corridor.
That focus still exists but the 75-mile strip of beach, freeway and light rail for speedier passage between Palm Beach and Miami is decidedly more crowded and less seasonal after the migration from New York to Florida during Covid. That’s when financial-services firms and many private equity shops and hedge funds moved operations for higher temperatures and lower taxes.
you look along the corridor. According to statistics from the Business Development Board of Palm Beach County, the area now has some 150 finance companies, mostly from New York City and supports nearly 74,000 jobs in finance. Big moves have included not only Citidal but Point72 Asset Management, Apollo Global Management, Blackstone, Icahn Capital Management and Cathy Woods’ ARK Investment Management, to name a few.
... the state of Florida is now ranked as the 14th largest economy in the world and clearly not just for the retired with the average age at a surprisingly low 39 years old in West Palm Beach, an area seeing a big surge in growth.
Today, the migration from New York continues but at a seemingly slower pace, so it’s worthwhile to take a look at some interesting data points behind the move to help understand the current state of the Sunshine State. Is this temporary or permanent -and the answer will impact the larger private-market ecosystem for meetings, conferences, business development and real-estate decisions?
In a recent interview Ken Griffin, the billionaire founder and CEO of hedge fund and marketmaking businesses Citadel and Citadel Securities, called Miami the “future of America” and said that Wall Street may one day be referred to Brickell Bay North, a nod to the growing residential and business neighborhood center of Miami. That is certainly a stamp of approval or at least a boast for the Brickell district, where he is building a $1-billion headquarters.
He may not be too far off, though, especially if
What’s more, the state of Florida is now ranked as the 14th largest economy in the world and clearly not just for the retired with the average age at a surprisingly low 39 years old in West Palm Beach, an area seeing a big surge in growth. Miami also was recently listed at No. 24 on the Global Financial Centers index, not a bad showing for a city mostly known until recently for Spring Break and art fairs such as Art Basel Miami.
But maybe the biggest indicator is the number of financial conferences taking place in the state each year, mostly in Palm Beach and Miami. Last count was 47 for 2024 with significant gatherings such as ABS East, Barron’s 100 Summit, iConnections Global Alts, Milken South Florida Dialogues and Pension & Investments Private Markets Conferences.
And to cater to jet-setting snowbirds, a new luxury FBO from Embassair is making Miami home with a state-of-the-art private jet terminal, providing all with the ultimate alternative to travel, no matter the time of year.
December 2023
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Letter from America
Multi Views on ‘Multi Strats’ Keep Hedge-Fund Style in Focus
As we head into a new year, we face a challenging mix of volatile interest rate and inflation outlooks, as well as an uncertain (more than ever) geopolitical landscape. Not an easy time to place financial bets.
But one area that continues to receive capital as well as media ink, especially under these conditions, are multistrategy hedge funds, even amid predictions for “peak pod” (more on that later). Although a subset of the overall hedge-fund landscape, they are mighty in scope and talent and have shown investors that they have the ability to deliver attractive risk-adjusted returns.
Let’s take a look why that is and what’s happening. First off, one-stop shop diversification is by far one of the most appealing factors of multistrategy funds -- or its subset the multi-manager funds -- for allocators and investors. That’s because multi-strats employ a wide variety of styles, from long/short, relative value, credit and fixed income, commodities or event-driven strategies, with each one run by distinct and separate groups or “pods” of specialist portfolio managers, all under one central operation. Quite simple in concept but complex in the details. The simple part: You get the rewards (or losses) from the fund as a whole with the goal that big gains will outweigh bad bets from the collective pods.
It comes as no surprise that these types of returns don’t come cheap (exposure to different asset classes is expensive business and investors are willing to pay for alpha) and so the fee structure is as unique as the funds themselves. Now comes the more complex part. Instead of management fees, multi-strategy funds “pass through” almost all of their expenses to their investors, which is a heftier price tag than fixed management fees.
Talent is extremely competitive in this “payto-perform” environment. Those who do well get more money, others get less or are shown the door (or in pod-shop speak, the “quantitative ejection seat”). And managers will pay up...
In the real world, the term pods may conjure up a secure or safe environment, but it appears it’s anything but that in the hedge-fund industry. Talent is extremely competitive in this “pay-to-perform” environment. Those who do well get more money, others get less or are shown the door (or in pod-shop speak, the “quantitative ejection seat”). And managers will pay up for talent because it’s fast in, fast out based on the numbers. This approach can add to the overall expense because it is labor intensive and volatile.
And the proof has been in the performance with some of the biggest, marquee players. Large multi-strategy funds such as Ken Griffin’s Citadel and Izzy Englander’s Millennium Management reportedly recorded returns of 15.3 percent and 10 percent last year, respectively. Steve Cohen’s Point72 Asset Management reportedly was up 10.6 percent. That compares with a reported average return for all hedge funds last year as high as 5.7 percent through November, the latest figures at press time, but estimates had varied slightly.
But no matter the situation, this is all about risk management, and observers speculate that is where we may see some reckoning in the months and years ahead. Performance by and large has been positive and raising money has had a history as a routine exercise. But competition in fund raising is steep as smaller and newer firms compete against the big proven performers. An oft-asked question has become, “I know you can manage upside but how do you manage the downside?” That remains to be seen. How many good multi-strategy or multi-manager ideas remain? Have they all been tapped out or are we at peak pod? Stay tuned.
Letter from America
The Builder of Businesses Now Buying the Builders
Private equity firms, often called the “Builder of Business” (think the likes of CD&R) and other assetmanagers, are out on a buying spree right now actually acquiring the builders themselves.
In this year alone – and we’re only in month two -- we have seen BlackRock, Inc. acquire Global Infrastructure Partners for $12.5 billion to create in its words “a world leading private-markets infrastructure investment platform.” That was soon followed by General Atlantic in its acquisition of Actis, which will become the growth-equity firm’s sustainable infrastructure arm.
And just last week, Brookfield Asset Management, an infrastructure investing behemoth itself, was reported to be raising more than $25 billion for two private funds focused on clean-energy investments.
Infrastructure is expected to be one of the fastestgrowing sectors, experts say, with a market size already estimated at $2.5 trillion and reaching $3.5 trillion by 2028. And the structural shifts driving demand are real...
At the time of his announcement, Larry Fink, BlackRock chair and CEO, said, “Infrastructure is one of the most exciting longterm investment opportunities, as a number of structural shifts re-shape the global economy.” This surely seems to be the case.
On the one hand, it’s good to see PE firms and asset managers in the business of buying hard assets or companies that actually make things. It’s a little bit back to the future in some ways after a stretch of acquisitions in enterprise software, fintech and professional and managerial services.
But let’s look at what is really happening and what is the case for infrastructure investments, a world that can mean anything from road, bridges and tunnels to airports and shipping ports, cell towers, data centers, hospitals and schools.
First, the market is big. Infrastructure is expected to be
one of the fastest-growing sectors, experts say, with a market size already estimated at $2.5 trillion and reaching $3.5 trillion by 2028. And the structural shifts driving demand are real: Let’s call them the three “Ds,” decarbonization, demographics and digitalization. The rapid pace of change, brought on in large part by climate change and the pandemic, highlight the need for a faster and bolder approach to energy transition, an upgraded transportation system, and improved and more secure communication hubs. By some estimates, on top of the contributions for President’s Biden’s Inflation Reduction Act, the US alone needs $5 trillion in investments to meet infrastructure needs.
Next, what resonates probably most for investors is that infrastructure projects tend to produce steady cash flows, a plus in times of market uncertainty, as well as consistent and stable inflationhedged returns.
And finally, there is the benefit that infrastructure investments have a waterfall effect on the communities they serve by providing jobs at higher wages and better services, bringing a good business or sustainability impact to the projects.
For the infrastructure companies themselves, the added cash through acquisitions also allows them to access a larger capital base and new technologies and talent for growth. Wins all around. Call it business builders helping builders build businesses.
February 2024
Letter from America
Private equity is lifting the lid as GP stakes sales gain momentum
Always an industry known for protecting its competitive advantages, a consolidation of sorts is taking place in private markets. In the last quarter of 2023, according to PitchBook, some 27 GP stakes deals took place, either as minority or majority transactions -- in an investment strategy that makes LPs out of GPs and PE peer groups even tighter,
GPs making investments into other PE firms in a strategy referred to as GP stakes is not new, with the first transactions taking place more than two decades ago. But interest has been on the rise especially with middle-market firms , as illustrated by higher deal counts but lower values per deal, across the industry.
into their own funds, expand into new asset classes and geographies, attract and retain the best talent and facilitate succession, among many other purposes. Additionally, and especially in the growing middlemarket GP stakes space, the GP stakes investors can offer the firms the strategic, operational, fundraising and managerial guidance and resources they would not otherwise have access to on their own.
...a consolidation of sorts is taking place in private markets. In the last quarter of 2023, according to PitchBook, some 27 GP stakes deals took place, either as minority or majority transactions...
The story got more interesting with the recent announcement that the credit giant and alts manager Blue Owl, based in New York, has launched a joint venture with Lunate, an asset manager with focus on alts out of Abu Dhabi. Together, these two firms will reportedly provide growth capital in leading private middle-market firms that have under $10 billion in assets under management.
The trend underscores an ongoing theme in recent strategies within private markets such as investments in infrastructure, secondaries, insurance and now even wealth management. In most of these cases, investors are looking for ways to generate strong income with the potential for capital appreciation and reduced correlation to broader equity markets. Given most GP stakes funds are perpetual vehicles that make regular distributions mainly derived from managers’ FRE, they fit that need very well.
For the GPs themselves, selling a stake provides the necessary liquidity needed in today’s environment as firms grow and need to fund higher GP commitments
One element of GP stakes transactions that differ from many traditional PE investments is that these sales are minority stakes to perpetual vehicles, where the buyer and seller will ideally be partners for decades to come. Accordingly, GP stakes firms must be especially conscious of their reputation as a reliable, value-added partner to the target, meaning price is not the only factor at play. The more GP stakes firms can emphasize their differentiated ability to collaborate with firms they invest in to grow and improve, the better they will be able to attract top-tier firms. Similarly, GPs looking to sell a stake must not only demonstrate a track record of fundraising and investment success, but also a strong reputation and a strategy to continue building on and accelerating that strong trajectory.
In a world that has been dominated by Dyal, the first dedicated group to pursue the strategy, to Blue Owl and others, we see firms such as AXA IM Prime, Bonaccord Capital Partners, Hunter Point Capital, and Wafra among others making inroads in the middle-market. As LPs become more comfortable with GPs as one of “them” in a transaction, the trend will likely continue to provide high-performing firms an opportunity to raise capital and build their brands.
Letter from America
Fund Financing Makes Room for NAV Facilities
The world of fund financing is getting more interesting. With the interest rate picture less clear (lower now or lower later and probably lower for longer), General Partners are looking to raise cash for a host of reasons. Enter net-asset value or NAV financing, a facility that originated in Europe and is gaining traction in the US market.
The idea is simple. Fund managers can borrower money based on the value of their portfolios, thus the term, and raise cash when liquidity is low for working capital, investor distributions or addon investments, among other needs. A neat solution for some with fund-raising still challenging and deal activity slow so it’s no surprise that the market is growing. According to one of the leading players in the US, 17Capital, which is owned by Oaktree Capital Management, reportedly estimated that the market could grow to more than $700 billion by the end of the decade from $100 billion today. Other significant players in the market have been Apollo Global Management Inc., Ares Management Corp. and AXA IM Prime, to name a few.
This may all seem a little unconventional, but steps do seem to be taking place to make it more conventional or at least easier to do. Private equity firms are considering including language in LP agreements that they can employ NAV facilities without approval from the investors.
...the NAV [financing] approach is attractive because financing costs can be lower than elsewhere and there is no disruption to current holdings that may have strong upside potential.
It’s not just the GPs who can take advantage of this type of financing. Limited partners are also looking to borrow against their holdings with portfolio managers until the market changes course. Like with the GPs, this gives pension funds, endowments and other institutions an option for liquidity without selling their holdings at discounted levels in the secondary market.
And what about the lenders? They receive repayments from the underlying assets and are at the top of the distribution list even though they are typically the last infusion of cash into the portfolio. To be sure, strong due diligence is in place that can help counter claims the move if just fancy financial footwork.
But you have to ask, what’s the catch? Some analysts caution you are adding debt to already leveraged investments that carry high interest rates when selling assets in the secondary market may be a better way to raise cash. Yes, but the NAV approach is attractive because financing costs can be lower than elsewhere and there is no disruption to current holdings that may have strong upside potential.
As the private market grows, NAV financing, along with GP stakes and secondaries, will all play together not just to make fund financing more interesting, but produce better alignment with all parties involved.
Letter from America
Alts Managers Accelerate Moves to Attract Wealth Channel in Competitive Race for New Funds
Follow the money: For the alts industry, the clear fund-raising path to follow was lined with institutional investors, from pension funds, insurance companies, foundations and endowments to sovereign wealth funds, to name a few. This has changed in the past year or so with these investors showing less of an appetite for alts (blame headwinds like tough deal environment, overallocation, interest rate concerns) even though demand to raise money remains high and competitive.
Enter the private wealth investor, long a thought bubble for liquidity, but is now fast becoming the most soughtafter target. The private wealth channel, as it is often called, of high-net-worth individuals have only about 2 percent allocated to private markets, according to a recent Hamilton Lane report, an extremely small but mighty percent of a big pool of capital.
education on what alts can deliver for their clients. Look at Blackstone, who has been an early player. Its president and chief operating officer, Jonathan Gray was featured on the cover of Forbes in the February/ March 2024 issue claiming a new era of private equity with individual-friendly funds poised for “an $80 trillion opportunity.” Front and center. Loud and clear.
[A strong brand] is important to attract the wealth market, whose advisors are looking for differentiation and even education on what alts can deliver for their clients.
A few other data points from Hamilton Lane, a private markets investment firm, show that private wealth managers likely ended last year with about $58 trillion in assets under management, compared with about $51 trillion from 2022. What’s more, research shows from the same report that if private-wealth investor allocation increased from that mere 2 percent to just 3 percent, another $580 billion of AUM will be added to private markets. That is big money to follow.
So what does this path look like now because it is not a familiar landscape for alts managers and comes with some expensive barriers to entry? What will matter now more than ever is profile, product and platforms.
First, a big profile -- or building a strong brand –is important to attract the wealth market, whose advisors are looking for differentiation and even
To that end, on the product side, Blackstone launched two funds directed at the individual investor, one focused on real estate (BREIT) and another credit (BCRED). Both have been successful amid some lessons learned, especially on the real estate fund, as redemptions hit hard during the market pullback. Ares Management and Apollo Global Management have entered the market and Carlyle has said that plans are in the works.
Market competition is fierce but not just within the specialized alternatives managers world. Retail giants have muscled their way in as well, taking a commanding lead. In fact, according to research from NMG Consulting, six of the top 10 retail alternative firms reportedly are not “pure-play alts managers” but instead include marquee names like Blackrock, GSAM, Fidelity and others. The big advantage here? Brand and distribution, the infrastructure, personnel and platforms to move product. To win this game, the alts managers will continue to build their brands and set up retail distribution networks for their products so that the money will indeed follow.
Letter from America
To Be Continued: A Secondaries with a Twist Gains Traction
At the Milken conference last month in Beverly Hills, cocktail-party talk ranged from the impact that generative AI is making on the investment world to the Elon Musk panel, where the maverick discussed how declining birth rates are a warning sign for civilization in much of the developed world.
But another conversation was also developing on a more niche topic for private markets about whether continuation funds – also referred to as GP-led secondaries -- were not just gaining traction as a strategy for private-equity sponsors but even winning acceptance as a strategy that benefits both General Partners and Limited Partners alike.
The old PE playbook at one time suggested that portfolios hold investments for anywhere from three to five years in order to implement value creation and then sell those companies to return capital back to the LPs.
for a GP may be to actually to buy back its best asset, in a circulate twist on an exit.
For the GP, the benefit is simple: extend the portfolio life of the best investments to generate additional value and liquidity. For LPs, this type of new fund allows them to continue to leverage the sponsor’s experience with this investment and even negotiate new deals terms that may align better with current interests. All LPs, of course, do not have to participate in the continuation fund and may cash out as planned. New LPs will likely join the vehicle as well.
... if a few companies in a portfolio are still scaling their businesses with good upside potential, then why not hold on to them for a while to realize more value...
That thinking seems to be changing. The GP reasoning follows that if a few companies in a portfolio are still scaling their businesses with good upside potential, then why not hold on to them for a while to realize more value even though it may be past the shelf life of the old playbook time period. As one manager said, “This is about building champions.”
According to industry estimates, as much as $40 billion of deals were completed in 2023, with more than $150 billion worth of transactions in the market in total so far. By some predictions and admittedly on the high end, the continuation funds or vehicle market is poised to hit as much as 20 percent of total M&A activity, a long runway from now for sure, but proponents see this as reasonable.
So how does this all really work?
A sponsor sells one or more of its portfolio companies in a fund to a newly formed continuation fund that is set up specifically for these investments, which will continue to be managed by that sponsor. It’s kind of like the best asset
Amid claims for steady growth in this strategy, detractors exist especially on the subject of conflicts of interest or even the perception of conflicts. Upon reflection, these are pretty easy to figure out: The GP actually has interests on both sides of the deal as the seller of the fund and buyer/manager of the continuation vehicle. Investors may raise issues on pricing and terms, among other topics. The best protection against these concerns is to present constant updates on each step in the process to all parties and provide rationale for all decisions. In fact, the Institutional Limited Partners Association or ILPA provides guidelines for best practices in managing the continuation fund process.
As the continuation-funds market grows and matures, it will no doubt start to lose some of its generalist status, observers say, noting we are already starting to see sector specialist move money into separate designated funds. For now, the strategy is destined to grow as another option for GPs to extract value, even if it is on a longertime continuum.
June 2024
Letter from America
Everyone Is Watching (and Investing in) Women Sports
I was at the Broadway show Cabaret last week and during intermission I saw a women with a tee-shirt that read, “Everyone Watches Women Sports.”
The message was not lost on me. But maybe it needed an asterisk that read, “Everyone Also Wants to Invest in Women Sports.” It may sound like hyperbole, but it is not far from the truth.
Let’s look at the first part, the fans. It’s well advertised that the fanbase for women’s sports is on a meteoric rise, whether it is on broadcast channels or live at stadiums with record numbers breaking over and over again. Call it the Caitlyn Clark effect, the WBNA superstar at the Indiana Fever, who along with Angel Reese and Kamilla Cardosa, both of the Chicago Sky, and others have pumped up the excitement for college basketball. But watching women’s sports expands beyond basketball to soccer, volleyball, tennis and golf.
A few examples for our asterisk on the tee shirt: PE firm Sixth Street acquired a majority stake in Bay FC in 2023 and is now part of its sports portfolio that includes soccer teams FC Barcelona and Real Madrid as well as the NBA’s Spurs. More recently, in June, Carlyle announced that it had acquired a majority stake in Seattle Reign FC for $58 million in a partnership with the Seattle Sounders FC.
And Kara Nortman, who launched Angel City FC in Los Angeles in 2019 has started a sports-focused PE firm called Monarch Collective, to be in her words an inspirational “change agent” type of equity product for teams and leagues at critical moments in their evolution.
The big opportunity and important part of this evolution, observers say, for investors, is the content play that these sports teams can contribute to revenue streams.
According to a recent report from Deloitte, elite women’s sports is expected to produce some $1.28 billion in global revenue for 2024, breaking the $1-billion mark for the first time. Soccer and basketball dominate total revenue at 71 percent, or 43% and 28%, respectively.
As a result, Deloitte also said it expects women’s elite sports will continue to be allocated additional prime time broadcast slots, making the women’s events easier to find and watch and more important, monetize. For now, however, matchday revenue is the biggest overall contributor to revenue, followed by broadcast and commercial (sponsorships, merchandise, partnerships).
Amid this backdrop, for the alternatives markets, women’s sports have been one of the latest investment opportunities, receiving more interest from private-equity firms.
The big opportunity and important part of this evolution, observers say, for investors, is the content play that these sports teams can contribute to revenue streams. This will come in many forms from broadcasting rights to leveraging live performances for experiential marketing and adjacent businesses. In turn, bigger broadcasting deals means more corporate sponsorships, more infrastructure and the golden ticket, better pay for athletes.
But in some ways, perhaps the best example of popularity, opportunity and success can be found at the National Women’s Soccer League’s Kansas City Current’s new $70-million stadium, a first for a women’s professional team that is now sold out for every game with a waiting list of 3,000 fans. An ,.ui11,500-seat stadium shows that everyone is actually watching women’s sport with many watching for the next best opportunity to invest as well. Soon, no asterisk will be needed.
July 2024
Editorial Board
Alastair Crabbe acrabbe@brodiecg.com
Darryl Noik dnoik@capricornfundmanagers.com
Jonty Campion jcampion@capricornfundmanagers.com
Lynda Stoelker lstoelker@capricornfundmanagers.com
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