Mega PE’s Exit Woes Trickle Down to Smaller Buyouts — And Endowment Investors

The University of Iowa’s Center for Advancement is leveraging its lower middle market funds in a tough market.

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The University of Iowa Center for Advancement has favored lower middle market buyouts over funds that focus on large companies. But the endowment is still at the mercy of mega private equity funds.

Jim Bethea, longtime chief investment officer for the $1.5 billion-in-assets Center for Advancement, says current market dynamics dictate that these smaller PE managers sell their companies to larger funds, but those funds aren’t buying. The system, he says, has gotten “gummed up.”

Last year, private equity exit volume was down 28 percent, according to EY. Pitchbook documented a similar decline in volume in exits from middle market companies.

The University of Iowa Center for Advancement has focused a big percentage of its equity allocation on lower middle market buyout funds. The thesis is that these investments may get overlooked.

“One of the reasons why we like that market is there’s just not a lot of competition there,” Bethea said about his team. While large portfolio companies are hiring investment banks, with many private equity firms bidding up their prices, those down-market may only get one or two bidders.

“There’s not a lot and it makes it a little bit easier to get returns,” Bethea added.

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But with purchases by big private equity funds at a standstill, middle market companies have few exit options.

“It started at the top when you got the big players that do rely on a lot of leverage,” Bethea said. Higher interest rates make leverage less attractive to take on. And so: “They’re not buying the companies, so the funds below them can’t sell.”

Still, within the bigger portfolio picture, these buyout funds make sense. “The main alpha driver portfolio is private investments,” Bethea said. He added that the Center for Advancement avoids hedge funds due to their opacity and is light on venture capital compared to some of its peers.

Bethea emphasized that the portfolio isn’t over-diversified. The foundation has four allocation pools: global equity, fixed income, real assets, and diversifying strategies. “You slice the pie 50 different ways, but you really only have equity and debt,” he said.

The UI Center for Advancement was created by merging the university’s alumni association and its foundation, with the intention of better serving the university’s community. Based in Iowa City, the university is home to the prestigious Iowa Writers’ Workshop and to basketball star Caitlin Clark, who is the NCAA Division I women’s all-time highest scorer.

These are some of Bethea’s selling points when asking for an allocation to a tough-to-access manager.

“Not every school has lighting in a bottle of something like that,” Bethea said, referring to Clark’s meteoric rise. “And you got to have to kind of talk to people about this is why we do this and let them understand that.”

Attracting talent, meanwhile, has required a different pitch. As Bethea grew his four-person team through the Covid-19 pandemic, he hired his team remotely. They continue to work in separate cities — and have succeeded doing so. Now Bethea has the resources to bring in an investment analyst.

Looking ahead, he won’t just be worried about hiring the right analyst for his team. Bethea has concerns about private credit, specifically that it’s going to “take over the world.”

“The number of pitch books I get on private credit, the number of invitations I get in conferences for dinners with private credit managers, it just kind of overwhelms you,” he said.

Over the one-year period ending September 30, 2023, the university returned 10.6 percent overall, beating the NACUBO average of 7.7 percent, and their peer group’s return of 5.9 percent.

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