Aug 28, 2018

Axios Pro Rata

By Dan Primack
Dan Primack
Top of the Morning
Source: Giphy

Sidecar private equity funds have become increasingly popular among public pensions and other large institutional investors, who argue they are getting a better deal than are those who can only access the "main funds." But new academic research suggests that it's not necessarily so.

  • The researchers, including Josh Lerner from Harvard and Antoinette Schoar from MIT, examined cashflow-level returns from around 5,500 funds, of which 32% were so-called alternative vehicles like discretionary co-investment or GP-directed sidecar funds.
  • "We use the records of State Street Corp., which plays a custodial role for these asset owners. The data captures all cash flows between limited partners and the private capital fund managers in their portfolios. In total, the data set includes over one half-trillion dollars of commitments in twenty thousand distinct investments by individual LPs between 1980 and mid-2017."

The researchers found that GP-directed funds had worse average performance than did the main funds raised at the same time by the same firms, while discretionary co-investment funds were basically a wash.

When examining top private equity managers, things changed a bit. GP-directed funds still came up short, but co-investment funds over-performed the main funds.

Bottom line: Our general understanding of private equity fundraising is that limited partners pick general partners, based on things like track record. But the reality is that persistence is a two-way street, and GPs often are the ones doing the picking.

More desirable LPs get better allocations in the main funds, and the opportunity to participate in co-investment funds. Less desirable LPs get worse (or no) allocations in the main funds, and are often pushed into GP-directed funds (i.e., lower-tier investors are given access to lower-tiered deals).

It's the sort of thing you won't see mentioned in a public pension press release. But it should be.


Apollo Global Management agreed to buy Aspen Insurance (NYSE: AHL) for $2.6 billion, or $42.75 per share (6.6% premium to Monday’s closing price).

  • Why it's the BFD: Because this is part of private equity's deepening love affair with specialty insurers, even as they've been hammered by falling prices and an upswing in costly natural disasters.
  • But, but, but: Earlier reports suggested that Aspen could sell for upwards of $50 per share, with the price likely being driven down by sluggish Q2 earnings and Blackstone bailing on the process.
  • Bottom line: The private-equity firm joins rivals such as Carlyle and Blackstone in building insurance assets to gain access to premium income, betting that they can generate higher returns. Apollo is pushing its annuity seller Athene Holding into Europe while increasing its stake in reinsurer Catalina Holdings Bermuda." — Neil Calanan, Bloomberg

🎧 Listen up: The latest Pro Rata podcast focuses on Bitcoin, and includes a discussion with CNBC anchor Melissa Lee (who just premiered a documentary on the cryptocurrency). Get it via Apple, Google Play or direct at Axios.

Today in Abraaj: Firm founder Arif Naqvi has reached a settlement on his $217 million bounced check case, just days after a UAE court sentenced him to three years in prison. Per UAE law, the settlement extinguishes the prison term. It also soothes the embarrassment we've all felt when bouncing $217 million checks.

Quiz Time: Can you name the South American tech startup that just raised new funding at a unicorn valuation? Hint: Most of its existing investors are based in Brazil or Silicon Valley, but there's also a bit of European money too.

Trade wars: The WSJ's William Mauldin provides some salient insights into U.S.-Canadian trade tensions, via new details about how private equity firm One Rock Partners convinced the U.S. Commerce Dept to impose tariffs on newsprint imports, for the benefit of a One Rock portfolio company (and to the detriment of U.S. newspaper publishers):

"The tariffs represent a remarkable success by a relatively little-known private-equity firm at pulling the levers of power in Washington for advantage."

Steve Mnuchin to CNBC this morning: "As Treasury Secretary, i respect the independence of the Fed. I meet with Jay Powell on a weekly basis we talk about a lot of economic issues. it would be inappropriate for me to comment on interest rates in that position... I, for one, am not concerned about the yield curve. I don't think that's a predictor of economic growth, it's a market condition."

Venture Capital Deals

🚗 Uber raised $500 million from existing investor Toyota, as part of a deal to jointly develop self-driving car technology.

Shansong Express, a Chinese last-mile urban delivery company, raised $60 million in Series D-1 funding from 5 Capital, V Star Capital, Shihaisong Capital, Shunwei Capital, SIG, BHG Long Hills Capital, Lighthouse VC and Hearst Ventures.

CargoX, a Brazilian on-demand trucking company, raised $60 million in Series D funding, Axios has learned. The Blackstone Group and Hudson Structured Capital co-led, and were joined by Goldman Sachs, Qualcomm Ventures, Soros, and Uber co-founder Oscar Salazar.

PlanDay, a Danish workforce collaboration platform for shift workers, raised €35 million in Series C funding. SEB Private Equity led, and was joined by return backers Creandum and Idinvest.

Narvar, a San Francisco-based post-purchase customer engagement platform, raised $30 million in Series C funding. Accel led and was joined by fellow return backer Battery Ventures and new investors Salesforce Ventures and Scale Venture Partners.

Shadowfax, an Indian hyper-local delivery company, raised $22 million in Series B funding. NGP Capital led, and was joined by Qualcomm Ventures, Mirae Asset Management and return backer Eight Roads Ventures.

Tascent, a Los Gatos, Calif.-based developer of “intuitive biometrics,” raised $19.5 million in Series B funding co-led by NEC Corp. and Tano Capital.

Indegy, an Israeli industrial cybersecurity company, raised $18 million in Series B funding. Liberty Media led, and was joined by Centrica PLC, OG Tech Ventures and return backers Shlomo Kramer, Magma Venture Partners, Vertex Ventures and Aspect Ventures.

Simple, an Australian marketing campaign management platform, raised US$17 million from BBRC Private Equity and Perle Ventures.

Foodsby, a Minneapolis-based corporate lunch delivery service that uses local restaurants, raised $13.5 million in Series B funding. Piper Jaffray Merchant Banking led, and was joined by return backers Greycroft Partners, Corazon Capital and Rally Ventures.

ZestMoney, an Indian digital lending platform, raised $13.4 million in Series A2 funding. Xiaomi led, and was joined by return backers PayU, Ribbit Capital and Omidyar Network.

☕ Bellwether Coffee, a Berkeley, Calif.-based maker of zero-emissions coffee roasters, raised $10 million in Series A funding. Congruent Ventures led, and was joined by FusionX Ventures, Tandem Capital, New Ground Ventures, Hardware Club and XN Ventures.

VGS, a San Francisco, Calif.-based data security startup, raised $8.5 million in Series A funding. Andreessen Horowitz led, and was joined by NYCA, Vertex Ventures, Slow Ventures and Max Levchin.

DrayNow, a Philadelphia-based marketplace for intermodal shipping brokers and motor carriers, raised $5 million in Series A funding. Comcast Ventures led, and was joined by Osage Venture Partners.

Exabel, a Norwegian maker of an automated monitoring tool for finance pros, raised $4.7 million in new seed funding from Vatne Equity, Andenæsgruppen, Sanden, Melesio Capital, Axan Invest, First Partners Holding 5, Holta Invest and LT Invest.

Private Equity Deals

Advent International plans to invest around $486 million into Walmart’s Brazilian business, in which it recently acquired an 80% stake.

Apollo Global Management agreed to buy a portfolio of non-performing loans from Bank of Cyprus for €1.4 billion.

Arlington Capital Partners acquired the government communications business of Black Box Corp. (Nasdaq: BBOX), which will be renamed Tyto Athene.

FFO Home, a Fort Smith, Ark.-based portfolio company of Sun Capital Partners, acquired Service Furniture and Bedding, a Fairdale, Ky.-based operator of home furnishings and bedding retailers in the Louisville area.

HKW acquired Urban Armor Gear, a Laguna Niguel, Calif.-based maker of rugged protective cases for mobile devices.

Kindercare, a Portland, Ore.-based childcare provider owned by Partners Group, has acquired Rainbow Child Care Center, a Troy, Mich.-based operator of 150 childcare centers in 16 states, from Quad-C Management.

SoftBank Vision Fund is investing over $100 million for a 51% stake in a joint venture with the international arm of Chinese insurer ZhongAn (HK: 6060).

Yellow Wood Partners agreed to buy Paris Presents, a Gurnee, Ill.-based maker of branded cosmetic and bath accessories, from EagleTree Capital.

Public Offerings

🚑 Alzheon, a Framingham, Mass.-based developer of small-molecule therapies for Alzheimer's disease, filed for a $70 million IPO with ThinkEquity as lead underwriter. The pre-revenue company, which has raised around $27 million in VC funding from firms like Ally Bridge Group, withdrew a prior IPO filing earlier this year, which was being led by Citi and Piper Jaffray.

⛽ Coronado Coal, a Wilton, Conn.-based coal miner owned by Energy and Minerals Group, is prepping an Australia IPO that could value the company at around A$3 billion, per Reuters.

Livent, a Philadelphia-based maker of lithium batteries for electric vehicles, filed for a $100 million IPO. It plans to list on the NYSE (LTHM) with BofA Merrill Lynch as lead underwriter. Livent is being spun out of FMC Corp. (NYSE: FMC), and reports $70 million of net income on $211 million in revenue for the first half of 2018.

Liquidity Events

VMWare (NYSE: VMW) agreed to buy CloudHealth Technologies, a Boston-based multi-cloud management platform. Reuters reports a $500 million price-tag, but we hear it’s at least a bit higher. CloudHealth had raised around $85 million, most recently at a $350 million post-money valuation, from firms like 406 Ventures, Kleiner Perkins, Meritech Capital Partners, Sapphire Ventures and Scale Venture Partners.

More M&A

Atlas Copco (Sweden: ATCO) agreed to buy the cryogenic business of Brooks Automation (Nasdaq: BRKS) for $675 million in cash.

Flatiron School, a coding bootcamp acquired last year by WeWork, has purchased Designation, a Chicago-based for-profit UX and UI education school., a New Plymouth, Idaho-based freight matching company, acquired D&S Factors, a Fruitland, Idaho-based factoring service for the transportation industry.

Final Numbers
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Data: Newzoo 2018 Global Esports Market Report; Chart: Chris Canipe/Axios
Dan Primack

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