Tentative Recovery Seen for Private Equity Funds

U.S. and European private equity, venture capital, and buyout funds showed strong levels of fund-raising in the first half of 2011, says Dow Jones LP Source.

(July 11, 2011) – In a positive sign for an otherwise gloomy economic outlook, U.S. and European private equity, venture capital, and buyout funds all enjoyed healthy fund-raising levels in the first half of 2011, says Dow Jones LP Source.

The private equity industry’s strong fund-raising puts it on pace to eclipse last year’s levels, with U.S. and European funds respectively collecting 35% and 48% more in capital committed over what was raised in the first half of 2010.

“After three consecutive years of declining fund-raising, the industry has finally begun to dig its way out of the crater created by the U.S. financial crisis in late 2008,” said Laura Kreutzer, managing editor of Dow Jones Private Equity Analyst, in a release. “There’s an abundance of fund managers with strong track records that are back in marketing mode and investors appear to have regained some level of confidence in the asset class.”

U.S. private equity funds raised $64.7 billion for 201 funds in the first half of 2011, compared with the $47.8 billion raised by 225 funds during the first half of 2010. European funds collected $24 billion for 62 funds during the period, well over the $16.2 billion raised for 76 funds a year earlier. Although the fund-raising remains below that seen before the 2008 market collapse, the first half of 2011 marked the strongest period of fund-raising since the downturn.

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Buyout funds prospered remarkably in the first half of 2011, showing fund-raising levels almost double that of the previous half-year’s. The capital influx was due in part to a greater number of firms looking to raise funds of more than $1 billion. Blackstone Group provided a prominent example of this trend recently when it announced that its buyout fund BCP V had exceeded expectations by raising as much as $1.5 billion over its predicted size of $15 billion.

“In 2009 and 2010, the multi-billion fund was like the California Condor in the 1980s,” said Kreutzer. “You knew it once existed, but who ever really saw one? This year, while they aren’t exactly plentiful, the multi-billion funds have finally come off of the endangered species list.”

Venture capital fund-raising was healthy in the U.S. but floundered in Europe. American venture funds rose 19% over the first half of 2010, hitting $8.1 billion, although the number of funds that held closings dropped 38% to 50 funds. The impressive figure was driven by a few prominent firms, seven of whom alone raised $6.3 billion. European venture funds had the worst first half of fund-raising since 2004. They raised $1.1 billion for 16 funds, a decline of 45% from the first half of 2010.

U.S. and European funds focused on mezzanine and secondary strategies showed flagging levels of fund-raising, a sign indicating the bullishness of investors. Investors prefer funds with mezzanine and secondary strategies during market downturns, Kreutzer explained.

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>

The Governmental Accounting Standards Board (GASB) has published proposals to improve the way US state and local governments report pension liabilities.

(July 10, 2011) — The Governmental Accounting Standards Board (GASB) has issued proposals to improve the way public pension funds in the United States report their liabilities.

“Users of state and local government financial reports have told the GASB that current standards do not provide enough information to adequately understand the cost and the liability for benefits promised to active and retired employees,” GASB Chairman Robert H. Attmore stated in a release. “The proposals contained in these Exposure Drafts are the result of years of research and extensive deliberations by the Board to address these issues and make financial reporting of pensions more transparent, comparable and useful to citizens, legislators, and bond analysts.”

He added: “It is important to note that these proposals relate to accounting and financial reporting, not to how governments approach the funding of their pension plans. Pension funding is a policy decision made by government officials.”

As investors have raised concerns that unrealistic expectations of investment returns have concealed the actual size of many unfunded pension obligations, the proposals aim to change the formula that schemes use to determine the value of their pensions. The proposals by GASB would require public pensions to highlight net unfunded liabilities on their balance sheets. As outlined in the release, GASB asserts that governments should be required to report a net pension liability, or the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside to pay benefits to current employees, retirees, and their beneficiaries. Specifically, proposed changes to how a government would calculate its total pension liability and pension expense include:

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Immediate recognition of more components of pension expense than is currently required, including the effect on the pension liability of changes in benefit terms, rather than deferral and amortization over as many as 30 years which is common for funding purposes.
Use of a discount rate that applies (a) the expected long-term rate of return on pension plan investments for which plan assets are expected to be available to make projected benefit payments and (b) the interest rate on a tax-exempt 30-year AA-or-higher rated municipal bond index to projected benefit payments for which plan assets are not expected to be available for long-term investment in a qualified trust.
Requiring governments in all types of covered pension plans to present more extensive note disclosures and required supplementary information.

Final rules are expected out by July 2012.

Read “Pension Quandary: Valuing Liabilities” in the Summer issue of aiCIO Magazine: a discussion of public fund discount rates – and what rates are and are not appropriate to use when defining a plan’s liabilities, by Charles E.F. Millard, the former Director of the U.S. Pension Benefit Guaranty Corporation and now a Managing director leading Citigroup’s Pension relations team.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742