Permanency of Capital Counts
On August 19, SK Capital Partners, a private investment firm focusing on private equity in the materials, chemicals, and healthcare sectors, announced the successful closing of its first institutional fund, SK Capital Partners III, with capital commitments totaling $500 million.
“I’m thankful we’re now closed, but it’s been interesting,” said Jim Marden, managing director at SK Capital Partners. “You want to get a diverse group when you’re raising capital, but fortunately some of that capital was a bit more permanent then others.”
Investments made by fund of hedge funds, are not as “permanent” as long-term oriented institutions, such as corporate pensions, banks or insurance companies, according to Marden. “Our institutional fund has permanency of capital. We could have kept it as a family office, but an institutional fund allows us to reach more people.”
With private equity, institutions always remain cautious as not to get too nose-deep in illiquid vehicles that may not pan out. Marden rebuts institutions interested in SK’s fund come prepared with the risks.
“Institutions know what they’re doing because there are guidelines, such those set by AIMA (Alternative Investment Management Association). They know the terms in advance of what it means to lock up capital. They way they get around this is with asset allocation,” Marden said.
Many institutions only allocate five to ten percent of their assets in illiquid investments such as private equity; 90 percent is kept in liquid instruments, according to Marden.
Consultants were still key in securing institutional assets, said Marden. “It varies by firms but most institutions just don’t have the manpower to get access to funds the way a consultant would.” Notably, public plans utilized consultants (and state funding groups) the most, according to Marden, compared with corporate pensions, banking, and insurance clients, with whom “deals were done directly.”
For private equity, the key to raising capital from institutions is not unlike the recent post-crisis plight of hedge funds: operational prudence.
“Institutions want operational prudence and a strong track record. They want to see that your team is focused, and that the team has been together…it’s all part a big check list,” Marden said.