At stake

Buyout firms risk conflicts in cosying up to SWFs

Buyout firms risk alienating other stakeholders by getting too close to a handful of major backers. CVC and Providence are the latest private equity houses to sell slivers of themselves to big pension and sovereign wealth funds. That brings capital to expand, or to plough back into the funds the PE shop manages. But it could also deter other investors from backing those funds because of conflicts of interest, real or perceived.

For private equity firms who aren’t pursuing a stock-market listing, the sale of a small stake, typically 10 per cent or less, in the management firm is becoming a well-worn alternative.

In a deal struck earlier this year but only recently publicised, CVC, a European large buyout specialist, brought in a trio of investors: SWFs from Hong Kong, Kuwait and Singapore, according to Bloomberg. Meanwhile, a Florida pension fund and an unnamed SWF invested in Providence, the US media-focused outfit. The duo follow others including Apax, Silver Lake and TPG.

Raising new buyout funds since the financial crisis begun has been a terrible slog. So cementing ties with big outside backers helps. They probably become more likely to commit bigger amounts. And some of the new capital can be put into a vehicle that also invests in the funds - effectively creating an in-house investor to stand alongside the private commitments of the PE firm’s partners. Other capital can go to fund new offices, or to push into allied areas, such as credit fund management.

But closing a large buyout fund nowadays requires commitments from a couple of hundred investors. Some will need reassuring that the new fund investors-cum-shareholders get no special treatment. Providence’s new shareholders are passive and contractually get no preferential offers to co-invest directly in new deals, nor any extra information not shared with other investors.

CVC probably has similar provisions. Safeguards like this may be enough to keep others onboard. But some might baulk. When State of Wisconsin Investment Board, for example, recently sold some big private equity stakes, its outside adviser said “going public or selling stakes to third parties” were ways in which the industry’s biggest firms had diminished the alignment of interests between private equity firms and fund investors.