How many other PE funds will have losses?

Whilst this article is about fund raising strategies we wonder how many more PE firms will have blown up funds?  Aivars Lode

The carrot and the stick (or just the carrot):
The news that TPG Capital is offering incentives to limited partners to commit to its seventh flagship buyout fund didn’t come as a surprise to many LPs.

The firm is trying to recover from two struggling funds, which took some devastating hits from the loss of Washington Mutual and the former TXU, now in bankruptcy court under the name Energy Future Holdings.

TPG Capital is a prime example of a firm with a shaky recent track record doing all it can to attract investors into its latest fund. However, the idea of using incentives to draw in bigger checks at a quicker pace has become an almost routine part of marketing these days, according to numerous LP and advisory sources interviewed by sister publication peHUB.

What was once a headline-grabbing novelty among mega-funds struggling through a tough fundraising environment post-financial crisis has become part of the package general partners bring to the negotiating table.

And while in 2010 and 2011 GPs needed that extra push to get over the finish line to their target, today GPs need that extra bit of zip to help differentiate themselves in what has become the most crowded private equity fundraising environment of all time.

According to the PE/VC Partnership Agreements Study 2014-2015, published by Thomson Reuters, about 14 percent of North American buyout funds offer special incentives to come into a first close, while the figure is 35 percent for funds of funds and secondary funds. Nearly one in five (18 percent) North American buyout funds offer fee breaks for bigger commitments, as do 42 percent of funds of funds and secondary funds.

“The market has gotten much more creative about incentives and creating urgency around (fund) closes,” said Neha Champaneria Markle, portfolio manager with the private equity fund group at Morgan Stanley Alternative Investment Partners. “There are a number of things that can catalyze action, whether it’s offering co-investment, offering preferential treatment in a secondary, (or) offering certain terms that might be meaningful to a specific investor.”

TPG’s special offer

TPG Capital is aiming to raise between $8 billion and $10 billion for its TPG Partners VII, a big step down from its $19 billion sixth pool that was generating a 1.39x total value multiple and an 11.9 percent internal rate of return as of June 30, 2014 for backer Oregon Public Employees Retirement Fund.

To incentivize LPs to cut big checks and come in early, TPG Capital is offering management fee discounts based on size and speed of commitments. All investors in the first close get a 10 percent discount, plus an additional 5 percent off for commitments of $100 million or more; an additional 10 percent for more commitments of more than $250 million, and an additional 15 percent for commitments of more than $400 million, Buyouts reported in September.

This is reminiscent of some of the big European shops who, shortly after the world began emerging from the financial crisis in 2010 and 2011, started offering early close discounts. Cinven, Permira and BC Partners all tried to incentivize LPs to get their commitments in early.

First-close discounts “highlight one of the biggest challenges sponsors have in fundraising—getting some impetus to getting to that first close. That is often the hardest part of fundraising,” according to Jordan Murray, a partner at law firm Debevoise & Plimpton.

“As a private equity sponsor, you’re trying to get investors off the sidelines, to give up liquidity and that free look they have on the portfolio. The longer they wait out there, the more options they have for their money,” Murray said.

Incentives do get the attention of LPs. One private equity investment officer at a U.S. public pension said if his team is looking at two GPs they want to commit to, the one that is offering incentives will get first look.

“If we don’t have the right amount of incentives, we’ll hang around the hoop and when time permits, (start working on the fund); if there is an incentive, we might reallocate resources if we’re properly incentivized,” the LP said.

- PE HUB

Vista Equity to buy Tibco Software for $4.3 billion

It will be interesting to see what happens to this deal in four years.... there is no way these numbers work.  Aivars Lode

Business software maker Tibco Software Inc on Sept. 29 said private equity firm Vista Equity Partners would take it private for $4.3 billion in the largest technology buyout this year, according to sister news service Reuters.

Vista will pay $24 per share in cash for Tibco. That would be a 26 percent premium to the stock’s closing price on Sept. 23, the day before Reuters reported that Vista was one the firms vying for Tibco. Tibco shares closed at $19.51 on Friday and rose more than 20 percent in premarket trading on Monday.

Palo Alto, California-based Tibco develops software that companies use in real-time data analysis involved in processes such as inventory keeping and cross-selling products. Its board had been under pressure from activist investors to sell the company.

The parties said they expected the deal, which is subject to approval from shareholders and regulators, to close in the fourth quarter.

Tibco spoke to more than 20 potential buyers, including some strategic technology companies, according to a source familiar with the situation.

This would be the second large leveraged tech buyout of September. Thoma Bravo took Compuware private in a $2.5 billion deal on Sept 2.

Still, there have been few leveraged buyouts of public companies in the last two years as a stock market rally has made most of them seem expensive for private equity funds trying to generate a multiple of their investors’ money.

Founded in 1997 as a subsidiary of Reuters Holdings Plc with backing from Cisco Systems Inc, Tibco went public in 1999 under Chief Executive Officer Vivek Ranadivé.

Ranadivé, an MIT computer scientist from India and owner of basketball’s Sacramento Kings, in 1986 founded Tibco’s predecessor, Teknekron Software Systems Inc, where he spearheaded the automation of Wall Street’s trading floors. Reuters acquired the company in 1994 for $125.1 million.

Tibco’s share prices has fallen 25 percent in the last 12 months as the company’s products, including flagship data platform Spotfire, have come under competitive pressure.

In June, the company named former senior Hewlett-Packard Co executive Todd Bradley as president. Two months later, activist investor Praesidium Investment Management Co LLC wrote to Tibco’s board calling for a sale, while Starboard also held shares.

Bradley left the company on Sunday, it said in a filing.

A review of strategic alternatives at Tibco started on Aug. 16, the company disclosed on Sept. 3.

Goldman Sachs was Tibco’s financial adviser. Vista was advised by Bank of America Corp, Deutsche Bank, Jefferies, JP Morgan and Union Square Advisors. Wilson Sonsini Goodrich & Rosati was Tibco’s legal adviser, while Kirkland & Ellis advised Vista.

Reuters

Stream of Lehman-Claim Payouts Is Drying Up

Lehman losses, REITS losses, and PE returns not what they promised. This does not sound good for those relying on yield.  Aivars Lode

Court Ruling Results in Some of the First Losses for Hedge Funds Due to Lehman

On the sixth anniversary of the firm's collapse, hedge funds got some losses on their Lehman claims. 

The smooth ride for hedge funds holding certain claims tied to Lehman Brothers Holding Inc. hit a speed bump last month.

A court ruling in the case hurt a swath of managers, including some of the biggest firms in the industry, that have in recent years enjoyed a steady stream of profits from the claims. The losses are among the first for hedge funds due to Lehman claims, managers and investors in hedge funds say.

Davidson Kempner Capital Management LP, which manages $23.7 billion, and Highfields Capital Management LP, with $13.1 billion, held some Lehman claims that lost about 10% in a day, according to people familiar with the matter. The hit contributed to the firms posting monthly losses of 0.3% and 1.3%, respectively.

Similarly, $22 billion King Street Capital Management LP, whose most profitable bet last quarter was Lehman, lost about 0.2% last month, in part due to those claims, investors say.

Lehman has "been the gift that keeps on giving" in the form of reliable payouts, said Stephen Nesbitt, chief executive of Cliffwater LLC, which advises institutional clients on alternative investments.

The recent losses are small on a percentage basis and come after big profits by hedge funds on Lehman, including Davidson Kempner and Highfields. Still, hedge-fund clients say such dips are rare for the marquee firms.

Last week marked the six-year anniversary of Lehman's collapse in September 2008, the largest Chapter 11 filing in history. After the bank failed, some creditors didn't want to wait for their money or take a chance that they wouldn't get paid at all. Hedge funds were willing buyers of their claims, betting they would gain in value after the initial panic subsided.

Since the bankruptcy, Lehman has consistently increased estimates of how much creditors would get back, helping hedge-fund managers rake in profits.

Some managers have assembled outsize positions. Lehman claims amounted to nearly 10% of Davidson Kempner's portfolio in its flagship fund, according to a person familiar with the matter.

On Aug. 5, the Second U.S. Circuit Court of Appeals issued a ruling that affirmed Barclays BARC.LN -1.07% PLC's right to billions of dollars in assets that the Lehman brokerage, Lehman Brothers Inc., had claimed belonged to it. The nearly $6 billion in securities and margin assets had gone to Barclays when it bought Lehman's U.S. brokerage business amid the unfolding of the financial crisis in September 2008.

After the ruling, unsecured claims against LBI, which had been trading around 46 cents on the dollar, dropped to 40 cents before closing the day around 42 cents, where they remained last week, according to an investor who holds some of the claims.

A negative ruling for LBI already was partially reflected in the claims' prices before the ruling, but some hedge funds believed a surprise ruling in favor of the brokerage would have sent quotes into the 60-cent range.

Claims against parent company Lehman Brothers Holdings Inc. dipped that day, too, though to a lesser degree.

LBHI claims are up about 25% this year, and recently changed hands at an all-time high, according to holders. LBI claims remain down nearly 10% this year.

Many funds bought LBI claims in the low 40-cent range. One hedge-fund holder said he expected to lose some money or break even on those claims, but said any losses would pale next to his profits on Lehman overall.

Hedge-fund giants Paulson & Co. and Elliott Management Corp. have collected some of the biggest Lehman profits. Paulson was largely unaffected by the LBI dip, according to a person familiar with the matter, holding few of the claims because it didn't like Lehman's chances of success on appeal. Elliott's position is concentrated in claims against Lehman's U.K. entity, said a person familiar with the firm.

While Lehman emerged from bankruptcy in March 2012, it has billions of dollars in remaining assets and more money to pay back creditors, along with continuing litigation with several parties.

The bank is expected to exist in some form for years to come. Creditors of the Lehman companies in the Chapter 11 case have received more than $80 billion, with the next distribution set for early October.

The brokerage business, which is under the purview of the bankruptcy court but not technically in bankruptcy protection, paid back retail customers almost immediately after Lehman's collapse. The trustee unwinding the brokerage, James W. Giddens, has paid back more than $105 billion to customers and hopes to have returned more than $110 billion when he is finished. Customers get 100% of their money back, while unsecured creditors get much less.

Hedge funds have been adapting to life after Lehman, said Eric Siegel, global head of hedge-fund investments for Citi Private Bank, increasingly making bets around mergers and in distressed situations in Europe.

"At this point, it's probably in at least the seventh inning or so," Mr. Siegel said. "You're getting toward the end of the trade."

Juliet Chung, Joseph Checkler - Wall Street Journal

Calpers Shows Masters of Hedge-Fund Universe Have No Clothes

The most surprising thing about the California Public Employees' Retirement System's announcement Monday that it will be exiting its $4 billion investment in hedge funds over the next year may not be the decision itself, but that it took so long.

In the fiscal year that ended this June, the pension fund's hedge-fund investments returned just 7.1%. That compares with a 12.5% return for the Vanguard Balanced Index Fund, which follows the allocation of 60% stocks, 40% bonds that pension funds have historically followed. In the prior year, Calpers's hedge-fund investments returned 7.4% versus 10.8% for the index fund.

It isn't just Calpers. Hedge-fund tracker HFR's composite index, which measures the equal-weighted performance, after fees, of over 2,000 funds, has been underperforming the passive bond-and-stock portfolio since 2009. During the crisis year of 2008, it lost 19%, only marginally better than the index fund's 22.2% loss. That performance made it a bit harder to accept the idea that hedge funds' ability to offer downside protection justifies the hefty fees they charge—typically a 2% management fee and 20% of investment profits.

What has happened to the onetime masters of the investing universe? Hedge funds may have become a victim of their own success. With assets under management tripling to $2.8 trillion from their 2004 level, according to HFR, the field has become so crowded that it isn't as easy for managers to consistently deliver strong performance. Indeed, just as actively managed mutual funds struggled to deliver returns commensurable with their fees and expenses as they boomed in the 1990s, hedge-fund returns have suffered over the past decade.

Certainly, within the broad universe of hedge funds there are managers who can consistently deliver strong performances. But within an increasingly crowded field, picking them is a skill in itself. That further reduces their allure for big investors like Calpers. Such funds can hire outside managers to do this, and incur additional fees, or develop that expertise in-house, and incur additional costs.

Indeed, Calpers said it wasn't hedge-funds returns, but the costs and complexity of running a portfolio of hedge-fund investments that drove its decision. Hedge funds represent just a tiny fraction of the $298 billion Calpers manages, so regardless of whether they performed very well or very poorly, they wouldn't do much to move the needle. For hedge funds to be worth the effort, the pension fund would have had to dedicate a far larger chunk of its portfolio to them.

Given how big Calpers is, and how crowded many hedge-fund strategies have become, such a move would further cut into hedge-fund returns. That is a particular risk since other pension funds, seeing Calpers as a bellwether, might have followed suit.

Instead, other pension funds may follow Calpers's lead and cut or reduce their hedge-fund exposures. One place the money might go is lower-cost strategies that mimic the aggregate returns of various hedge-fund strategies—something that Calpers has begun doing. These promise to provide institutional investors index-like investments that can round out the risk profile of their portfolios like hedge funds do—but without the high fees.

Calpers's move is hardly a death knell for hedge funds. There will always be smaller, sophisticated investors with the patience and experience to find great hedge-fund managers. And there will always be others, seduced by the mystique hedge funds offer, who invest in them even though they shouldn't.

But the high-water mark for hedge funds may have passed. Increasingly, investors will question why hedge funds charge so much for what they do. Hedge-fund managers who don't have a performance-based answer will be in trouble.

By Justin Lahart  - Wall Street Journal