Asset Management: Private equity backlash

Private equity ignores protests at its peril

Boom times are continuing for the founders and top executives of the largest private equity groups in the US. They’ve seen the value of their shares rise by more than $40bn since the beginning of 2023 as new assets have poured into their firms, writes Antoine Gara in New York.

Shares in Blackstone, KKR, Apollo Global, Ares Management and TPG have neared or eclipsed record highs due to better-than-feared financial results. Those earnings were buoyed by growth in the firms’ overall assets, particularly credit and insurance-based investment operations, which benefited from fast-rising interest rates.

But even beneficiaries are starting to protest. Take Calstrs, the $327bn US pension fund that is one of the world’s biggest backers of private equity. Last week, Christopher Ailman, outgoing chief investment officer at Calstrs, warned that while “it’s great [private equity funds] make money for our retirees — who are teachers — and for other funds . . . they need to also share the wealth with the workers of those companies and with the communities they invest in”.

Ailman, who pioneered Calstrs’ move into private equity two decades ago and now holds $50bn in the asset class, told Josephine Cumbo in an interview that “private equity has not shared enough revenues”.

Some private equity managers have taken steps to ensure that employees at companies they own can share in the profits, if the firm performs well. New York-based KKR says that billions of dollars in equity have been shared between more than 60,000 employees at its portfolio companies since 2011. 

Last year, the firm committed to offering equity-sharing programmes to all employees in the takeover deals coming from its $19bn North American private equity fund and in all future funds in the region. 

More than two dozen buyout groups, including Apollo, TPG, Warburg Pincus and Advent International have committed to a plan called Ownership Works that aims to generate more than $20bn in wealth for workers by 2030.

Private equity ignores protests at its peril, writes Gillian Tett in this column. She makes three key points. First, chatter about a backlash is (yet another) sign that years of cheap money have created bubbles.

The second key point is that the sector’s leaders need to learn from financial history about what not to do when faced with protest. And thirdly: insofar as the private equity world is trying to refashion its image and social contract, this is contributing to subtle-but-important shifts in how we imagine capitalism. 

Reports of a private equity backlash are greatly exaggerated. Or are they? Email me: harriet.agnew@ft.com

SEC’s Gensler plays down hedge fund fears over Treasury dealer rule

The top US securities regulator has played down the impact on hedge funds of a new rule tightening oversight of the Treasury bond market.

Gary Gensler, chair of the Securities and Exchange Commission, told my colleagues Kate Duguid, Stefania Palma and Costas Mourselas in an interview that they are not the main target. He said the so-called dealer rule his agency passed this month is more focused on big high-speed trading firms than on hedge funds. 

The rule mandates that more large traders must register as dealers — firms that are regularly engaged in providing liquidity to the marketplace — a status that requires them to hold capital and report trades to the regulator. 

Hedge fund groups have sounded worries that registration will be required for their members, but Gensler said the rule was aimed mainly at the high-speed trading firms that often buy and sell securities in fractions of a second. 

“[The dealer rule] is primarily about principal trading firms that dealer trade. That’s what that rule is principally about,” Gensler said. 

The hedge fund industry criticised the SEC immediately after the publication of the final rule on February 6, concerned they would be caught up in the new regulation. 

“Alternative asset managers are not dealers,” said Bryan Corbett, president of the Managed Funds Association, raising concerns that “the rule may not go far enough in excluding them and private funds from being regulated as dealers”. 

In an analysis accompanying the final rule, the SEC said that there might be up to 16 private funds — a category that includes hedge funds — that fit the bill. Gensler emphasised that it was “up to” that figure. 

Confusion over the dealer rule comes in part because its original draft, when it was proposed nearly two years ago, would have captured many hedge funds in addition to principal trading firms. The hedge fund industry responded with outrage. The final rule seemed to take those objections into consideration. But, even with SEC concessions, hedge funds were not convinced that they had been excluded.

Chart of the week

A sell-off in global bond markets combined with a rally in stocks this year shows that investors’ all-consuming obsession with the path of inflation and interest rates may finally be ending, write Mary McDougall and Stephanie Stacey in London.

Wall Street has led a 3.8 per cent gain for developed market stocks so far this year, boosted by the outsize strength of the US economy, while an index of global bonds has dropped 2.8 per cent as investors have dialled back their expectations of interest rate cuts.

Such divergent moves mark a break from the past year or more, when the two assets have tended to rise or fall together, and could herald a return to the previous pattern where lower-risk fixed income acted as a counterweight to riskier equities.

The shift is likely to come as a relief to the many investors holding forms of the so-called “60/40” portfolio, which allocates 60 per cent to stocks and 40 per cent to bonds and is designed to lower risk and provide diversification during market shocks.

“60/40 is not dead, it was just taking a break,” said Ronald Temple, chief market strategist at Lazard. Such portfolios were hard hit in 2022 when both stocks and bonds tumbled — a scenario for which such portfolios were not designed, although they performed well late last year when both assets surged in tandem on hopes of rapid interest rate cuts in 2024.

Five unmissable stories this week

JPMorgan Asset Management and State Street Global Advisors are quitting Climate Action 100+, an investor group set up to prod companies over global warming, and BlackRock is scaling back its participation. The departures weaken the climate group’s plan to use shareholder influence to step up pressure on polluting companies to decarbonise, because they mean that none of the world’s five largest asset managers are fully behind the effort.

A high-profile shareholder in Abrdn dumped the stock after losing faith in management’s ability to turn the flagging UK asset manager around, adding to pressure on chief executive Stephen Bird. US investment firm Harris Associates, which has more than $100bn in assets under management, “sold the stock last year as [we] lacked confidence that management could repair the business”, David Herro, the firm’s deputy chair, told the Financial Times.

The Bank of England’s Prudential Regulation Authority, which supervises insurers, warned last year that the systematic use of so-called funded reinsurance deals posed “significant potential risks” to UK pension providers. Now the BoE plans to stress test insurers on their exposure to reinsurers through a flurry of corporate pension deals, as concerns mount about the risk posed by offshore arrangements to UK retirement savers. 

Donald Mackenzie, one of CVC Capital Partners’ co-founders and most successful dealmakers, is stepping back from Europe’s largest buyout firm ahead of its long-awaited public listing. Mackenzie, 66, was among a small group of executives at Citibank who spun out in 1993 to form what is now one of Europe’s biggest private equity firms, with €188bn in assets. 

Investor eagerness to allocate more money to the hedge fund industry’s costly mega-managers has driven up average fees for the first time in a decade. According to a survey by BNP Paribas of 238 hedge fund investors, annual performance fees increased to 17.82 per cent this year from 16.91 in 2023, the highest level since 2016. This reflects how global investors are allocating billions of dollars to multi-manager hedge funds that emulate Ken Griffin’s Citadel and Izzy Englander’s Millennium Management.

And finally

Dennis Severs came to Spitalfields in 1979 and bought a derelict house saved by the Spitalfields Trust, in the part of east London where Jack the Ripper prowled. He reconfigured it to tell the story of an imaginary family of Huguenot silk weavers who had lived there since it was built in 1724. “I’m going to bombard your senses,’‘ Severs said in an interview in 1995. “I will get the 20th century out of your eyes, ears and everything. With every age we visit, we’ll be governed by a spirit.” His New York Times obituary descibes the rooms as ressembling “Hogarth paintings, Dickens stage sets and a three-dimensional Beatrix Potter drawing. All were arranged to appear as though somebody had just left.” The house is open Thursday to Sunday with staggered entry.