Pension funds lag on private equity allocations; PE exits shape earnout trends

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

The gap between global pension funds' target allocations to private equity and their actual commitments to the asset class is widening.

S&P Global Market Intelligence analyzed the private equity allocations of 362 pension funds worldwide in mid-June and found that they were $6.4 million below their target allocation to private equity at the median. In March, a similar analysis put the median underallocation closer to $4 million.

The shortfall is not necessarily due to a lack of enthusiasm for private equity among this key group of limited partners as the situation for California Public Employees' Retirement System demonstrates. CalPERS is $6.81 billion off its $59.84 billion target for private equity, but that is because it is still playing catch-up after raising its private equity allocation to 13% from 8% of its portfolio in its 2022–2023 fiscal year.

A tough M&A market is more likely the real culprit, disrupting and lengthening the private equity investment cycle. Limited partners, including pension funds, often reinvest distributions from their private equity investments, but the lack of exit activity means those distributions are smaller and scarcer.

Read more about pension funds' deployment of capital to private equity in the second quarter.

CHART OF THE WEEK: Private equity exits make up a growing share of M&A deals with earnouts

⮞ Private equity exits represent a growing share of M&A deals with earnout provisions, which make a portion of deal value contingent on the acquisition target hitting future performance benchmarks.

⮞ Exits accounted for 19.5% of M&A earnout deals globally by value in 2021 and 16.5% in 2022, but that rate increased to 22.1% between Jan. 1 and June 19, according to Market Intelligence data.

⮞ Earnout provisions can help bridge the gap between buyers and sellers that cannot see eye-to-eye on the M&A target's valuation.

TOP DEALS AND FUNDRAISING

– KKR & Co. Inc. increased its offer to acquire Circor International Inc., a mission-critical flow control products and services company, to $56 per share in cash after Arcline Investment Management LP made a bid for Circor at $57 per share. Circor's board unanimously supports the amended agreement with KKR and recommends that stockholders vote in favor of the transaction.

Circor's board unanimously believes KKR's agreement offers increased deal certainty, which more than offsets the price difference, according to a release. The deal remains on track to close in the fourth quarter.

– Vista Equity Partners Management LLC agreed to sell cloud-based enterprise platform Apptio Inc. to International Business Machines Corp. in a cash deal valued at $4.60 billion. IBM expects to complete the deal in the second half of 2023.

– TiLT Capital Partners SAS' first fund, TiLT Capital Fund 1, hit its fundraising target of €250 million and is aiming for a hard cap of €300 million by October.

– Vertex Ventures HC launched its $200 million third fund, which will invest in life sciences and medical technology companies.

MIDDLE-MARKET HIGHLIGHTS

– Integral Corp. and its fund affiliates are divesting BTC Corp., a Japan-based cloud and digital services provider, in a deal with Capgemini SE. The transaction is expected to be finalized in the coming months.

– Ilion Capital Partners acquired Mid-States Supply Co. Inc., a distributor specializing in valves, pipes and fittings. The seller was Staple Street Capital LLC.

– HIG Capital LLC made a growth investment in Advanced Dental Brands LLC, which has a network of about 40 dental practices, through an affiliate.

– Appian Capital Advisory LLP purchased a roughly 90% stake in the Rosh Pinah zinc mine in Namibia from Trevali Mining Corp.

FOCUS ON: MEDIA AND ENTERTAINMENT

– Trinity Hunt Partners LP added REQ, a Washington, DC-based digital marketing and advertising company, to its portfolio.

– GMF Capital LLC, through an affiliate, bought a majority stake in digital media platform Motorsport Network. The buyer has an option to purchase the remaining minority stake at a later date.

– Y Combinator, BoxGroup Services LLC, Initialized Capital Management LLC, Soma Capital Management LLC and Chapter One Ventures LP sold Caldera Labs Inc. to Ramp Business Corp. Caldera operates Cohere.io, a conversational AI platform for customer support and onboarding experiences.

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.