NEW YORK -- Parag Saxena is more than halfway in possession of a case of Coca-Cola courtesy of former Chancellor LGT Asset Management Chief Investment Officer Warren Shaw.
The two men bet a case of soda -- Mr. Shaw would get a case of Diet Pepsi if he were victorious -- about the amount of money that would be raised in the private equity sector from pension funds in 2000.
Mr. Saxena, a Chancellor LGT managing director and head of alternative investments, said $100 billion would be raised in private equity in the year ending the current millennium. Mr. Shaw was somewhat less sanguine, Mr. Saxena said.
According to Securities Data Corp. and Asset Alternatives Inc., a record $50.9 billion of private equity was raised in 1997, surpassing 1996's record $32.1 billion.
Private equity, as measured by the two organizations, consists of venture capital funds, buyout funds, subordinated debt funds, restructuring funds and other nonmarket securities funds.
Buyouts, venture capital and subordinated debt funds all set new records for money raised in 1997. Restructuring funds had their best year since the early 1990s.
"This (wager) goes back to mid-1995 when it was less likely," Mr. Saxena said. "I was encountering clients who had never invested in private equity because they didn't have authority or the people to evaluate the partnerships."
More pension fund boards of trustees have approved private equity allocations since 1995, Mr. Saxena said.
Total pension fund assets were estimated around $3 trillion to $4 trillion at the time, he said.
"If they allocated 2% to 5%, which is what you are seeing, it seemed to me there would be a large amount of money looking for a home."
A 5% allocation on $3.5 trillion -- total pension assets are now estimated at around $6 trillion -- would yield $175 billion.
The 5% allocation to private equity by sophisticated investors is plausible, Mr. Saxena said, given the general public's $200 billion-a-year investment in public equity via mutual funds.
A recent newsletter on private equity trends published by pension fund consultant Callan Associates stopped short of endorsing Mr. Saxena's logic.
"Will 1998 be another banner year?" asked the Callan newsletter. "Callan is seeing more plan sponsors increase their allocations to private equity and more plan sponsors are making new allocations to this asset class.
"Barring any extreme movements in the public markets, the private markets should see another year of strong fund-raisings."
Looks like Mr. Saxena will be toasting 2001 with Coke.
Connecticut forges own path on private equity
HARTFORD, Conn. -- It isn't notable the State of Connecticut Retirement & Trust Funds began increasing its exposure to private equity investments, although its 10% allocation is one of the highest among pension funds.
What is noteworthy is that Connecticut, which operates with a bare-bones staff, is investing in private equity without the assistance of a consultant.
"We don't need to have a consultant and pay $500,000 to say 'these guys know what they are doing'," said State Treasurer Paul Silvester, the sole trustee of the $18 billion pension fund.
Connecticut's private equity staff consists of Michael McDonald, the director of private equity who joined the pension fund last year from the Pennsylvania State Employes' Retirement System, and Elizabeth Ward, an attorney who will negotiate the contract terms.
The fund is investing via partnerships for buyouts and mezzanine investments. A fund-of-funds structure is used for venture capital.
"I know what needs to be looked at," said Mr. Silvester, a former corporate finance investment banker. "I am confident that we can put together a program to select top performers."
Mr. Silvester is averse to consultants because they often are unyielding in their rules; many have earned the enmity of general partners, which could put the investors at a disadvantage.
"A lot of funds won't put up with the nonsense that consultants put them through," Mr. Silvester said. "A lot of them (consultants) won't recommend first-time funds.
"If a manager has a personal track record, we will do it."
Mr. Silvester also is confident that he and Mr. McDonald can handle the private equity portfolio because it uses Private Edge, an accounting system offered by its custodian, State Street Bank & Trust Co., that values nontraditional investments.
The system also allows Connecticut to monitor the individual investments made by the partnerships, he said.
Mr. Silvester said he doesn't expect that concentrating so closely with private equity will prove too time consuming.
"Are we too busy?" he asked. "No. That is when you start making mistakes."
Software takes some guessing out of purchases
PHOENIX -- Looking for the perfect gift for the do-it-yourselfer buyout investor? Try Buy-Out Plan for Windows, a software package that allows investors to analyze, value, price, structure and finance acquisitions.
The program is offered by MoneySoft Inc., a software developer.
Buy-Out Plan is targeted to strategic buyers of businesses, but it also has applications for pension funds that invest directly in buyouts, said Robert Machiz, president of MoneySoft.
"One of your equity partners informs you that they need a minimum IRR (internal rate of return) of 30% and they want to exit the deal after four years," Mr. Machiz said. "What percentage of total equity is necessary to meet this investor's hurdle rate?
"How does it affect the return to the remaining investors?
"Buy-Out Plan helps business buyers avoid two devastating mistakes: Paying too much for the company and agreeing to terms that don't make sense."
The software also can calculate historic performance and projected performance of acquisitions; compute market valuations; establish pricing and structuring using DealSense, an embedded software package; create an acquisition funding plan; and create reports for senior management, lenders and investors.
Buy-Out plan will run on a system with Windows 3.1 or Windows 95 and a 486/50 processor, although one with a Pentium is recommended.
U.S. interest strong in Latin America
NEW YORK -- The data is unreliable, but Price Waterhouse's confidence in the trend is unshakable: the amount of money committed by U.S. private equity investment funds to Latin American private equity funds is growing exponentially.
A survey that Price Waterhouse published in February calculated that U.S. private equity investment funds committed more than $2.6 billion to Latin American private equity investments funds.
"That is the amount that answered our survey," said Ricardo Silvagni, managing partner of Price Waterhouse's Latin American Business Center. "The amount is much higher.
"The increase has been exponential," said Mr. Silvagni, who estimates that between $7 billion and $8 billion in total has been committed. "Three to four years ago, there were almost no funds for this part of the globe.
"Now it is growing rapidly."
In past years, some general funds used a small part of their fund to invest in Latin America, Mr. Silvagni said.
"Real and deep-seated" governmental and financial reforms have made Latin America an attractive destination for emerging market private equity capital, according to Mr. Silvagni.
"The presence of U.S. institutional capital is a concrete demonstration of this evolving market," he said. "These are sophisticated investors, and they are placing a long-term bet on Latin America."
The survey noted:
* Argentina, Brazil and Mexico are expected to be the most popular sites for investments in 1998-1999;
* Financial services, consumer products and entertainment, and media and communications are the most preferred industries; and
* There will be more than one possible exit strategy for investors, among them: a domestic initial public offering, an international IPO, a domestic strategic buyer or a global strategic buyer.