Investor appetite for buyout funds wanes; sovereigns boost coinvestments

S&P Global Market Intelligence offers our top picks of global private equity news stories and more published throughout the week.

It is the middle of the earnings season for the listed alternative asset managers, and it is becoming increasingly clear that the muted performance of private equity portfolios is hampering fundraising for buyout strategies.

Take Ares Management Corp. for example. The Los Angeles-headquartered firm on April 28 reported $11.3 billion in first-quarter fundraising, though just $100 million of that total went to its private equity strategies. Ares' private credit strategies got the most attention from investors, sopping up over 70% of the firm's first-quarter inflows.

CEO Michael Arougheti said poor private equity fundraising was "largely a function of the transaction environment." Fewer exits mean less money is returned to investors via distributions, and that leaves investors with less capacity to commit to new fund vintages.

Investors are also putting their money where the action is, showing a strong preference for private credit, which is seeing increased demand amid rising interest rates and tighter lending standards, and powering private equity secondaries funds to their second-best fundraising quarter in a decade.

The Carlyle Group Inc. CFO Curtis Buser said on an earnings call May 4 that inflows at his firm were "skewed further" toward private credit and secondaries strategies and away from private equity in the first three months of 2023. He was blunt about the dimming prospects for the Carlyle private equity funds currently in the market.

"While we believe that we will attract a significant amount of capital for our next vintage of buyout funds, we no longer expect these funds in the aggregate to be the same size as their predecessors and now expect to see a decline in buyout fund sizes across most geographies," Buser said.

Read more about Ares' first-quarter earnings call here and Carlyle's here.

CHART OF THE WEEK: Sovereign wealth funds lead on coinvestments

⮞ Sovereign wealth funds have taken a larger share of private equity coinvestment activity in recent years compared with three other prominent limited partner (LP) groups: pension funds, family offices and corporate investors.

⮞ Among those four LP groups, transactions that partner a sovereign wealth fund and a private equity or venture capital firm account for over 47% of coinvestment deal value since 2021, up from 31% in the 2018–2020 period.

⮞ The median size of a sovereign wealth fund-backed coinvestment deal increased 23% year over year in 2022, even as the median value of coinvestments involving pension funds plunged 81%.

TOP DEALS AND FUNDRAISING

– Funds managed by Blackstone Inc.'s Blackstone GP Stakes took a minority stake in growth equity investment firm FTV Management Co. LP, or FTV Capital.

– KKR & Co. Inc. agreed to buy datacenter cooling solutions provider CoolIT Systems Inc. The deal is expected to close during the second quarter.

– Investindustrial held the final close for its Investindustrial Growth III SCSP fund, which raised €1.1 billion. The vehicle will invest in businesses in the lower middle market.

– Kian Capital Partners LLC closed Kian Growth Partners III LP, its latest fund, at $400 million.

– Pictet Alternative Advisors SA raised $2.5 billion in capital commitments across its two private equity funds at final close. Monte Rosa VI pulled in a total of $1.6 billion and Monte Rosa Co-Investment V's total capital closed at $900 million.

MIDDLE-MARKET HIGHLIGHTS

– New Mountain Capital LLC signed a deal to purchase Apixio Inc., an artificial intelligence platform, from Centene Corp.

– Kinderhook Industries LLC sold sustainable environmental service provider Circon Holdings Inc. to Covanta Holding Corp.

– Allstar Services, which provides residential exterior replacement, repair and maintenance services, was acquired by funds managed by Morgan Stanley Capital Partners, the middle-market focused private equity team at Morgan Stanley Investment Management Inc.

– Maven Capital Partners UK LLP, Midven Ltd., Foresight Group LLP, FSE Fund Managers Ltd. and British Business Investments Ltd. are part of an investor group that divested Roadgas Ltd. to Pretoria Energy Co. Holdings Ltd. and Mercuria Clean Energy Investments BV, S&P Global Market Intelligence data shows.

FOCUS ON: SYSTEMS SOFTWARE

– Permira Advisers Ltd.'s Permira Growth Opportunities fund bought a significant minority stake in BioCatch Ltd. Permira became the third-largest shareholder in the Israeli company, which specializes in behavioral biometrics intelligence and digital fraud detection.

– A private equity investor group including Faith Capital Holding, Graph Ventures LLC, SRI Capital, Bullpen Management LLC and 500 Global sold Fakespot Inc., which operates a data analytics platform that sports fake online product reviews, to Mozilla Corp.

– Think3 sold mobile application publishing platform Bizness Apps Inc. to BuildFire.

For further private equity deals, read our latest In Play report, which looks at potential private equity-backed M&A, including rumored transactions, each week.