Has the LP allocation shift begun?

Welcome to this week's Capital Call - your Wednesday dose of private market insights without the jargon. At OneFund, understanding market shifts is crucial for making informed investment decisions.

Pour yourself something nice and dive in. 

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🧠 THE BIG IDEA

The Allocation Exodus

Trade uncertainty has created an unexpected development: institutional capital is redrawing the global investment map. A third of Canadian and European LPs are shifting private equity allocations to be "less weighted to US and more to Europe."

The scale becomes clear when you combine this with European public-to-private deals jumping 65% in 2024 and the Spectris bidding war drawing $10 billion in competing offers from KKR and Advent. Add 30% of GPs reassessing deal timelines due to trade policies, and a pattern emerges.

The question isn't whether trade tensions will affect deal flow—they already have. The question is whether investors recognize that this disruption is accelerating a geographic reallocation that creates opportunities for firms positioned to capitalize on shifting capital flows.

📈 MARKET MOVERS

📊 Ex-Blackstone Investor Raises $7M for Meridian, Private Equity's New AI Operating System
A former Blackstone investor has successfully raised $7 million for a new AI operating system aimed at enhancing private equity operations. This development could signal a shift towards technology-driven efficiencies in the sector, which may attract LP interest in innovative solutions. Read the details

🏛️ İşbank Private Equity's $39 Million for Harvard Lab Labelled New Model for Science Funding
İşbank's investment in a Harvard lab represents a novel approach to funding scientific research through private equity, which could inspire LPs to explore similar models in their portfolios, enhancing diversification and impact. Learn more

🏠 HVAC Companies Are Private Equity's Latest Target
The article highlights the growing trend of private equity firms targeting HVAC companies, indicating a shift in investment focus towards essential service sectors. This could signal robust opportunities for LPs looking for stable returns in a resilient market.
View the analysis

💻 Couchbase Agrees to be Acquired by Private Equity Firm Haveli for $1.5B
Couchbase's acquisition by Haveli for $1.5 billion highlights the ongoing trend of private equity firms targeting technology companies. This deal not only reflects the robust appetite for tech investments but also signals potential returns for LPs involved in such funds. See the transaction

🌏 Ares Said to Buy Northstar Funds for Asia Private Equity Growth
Ares Management's acquisition of Northstar Funds marks a significant move in the Asian private equity market, indicating strong growth potential in the region. Get the insights

🔍 DEEP DIVE

The Mechanics of Capital Reallocation

The LP reallocation isn't happening by accident. It reflects institutional investors executing specific strategies to capitalize on geographic pricing dislocations.

The geographic arbitrage process begins with valuation and currency effects. European multiples hit a record 12.1x EBITDA in 2024, but currency weakness means UK assets are effectively trading at 15-20% discounts for US buyers compared to 2022 levels.

The Spectris situation demonstrates this arbitrage in action. Advent's winning $5 billion bid represented a 50% premium to the stock price, but this wasn't desperation—it was calculated arbitrage. Advent recognized that currency tailwinds and operational improvements would justify the premium.

Firms are implementing "optionality positioning"—acquiring companies with strong domestic foundations while maintaining flexibility for international expansion when conditions normalize. EY's data shows 87% of firms now work with portfolio companies on supply chain assessment, but the most effective firms are building capabilities that turn geographic complexity into competitive advantage.

The LP Rebalancing Mechanism

The $150 billion secondaries market provides the infrastructure for this reallocation. LPs are using secondaries to adjust geographic exposure without waiting for traditional distribution cycles.

The mechanics are straightforward: Canadian pension funds exit US positions through secondaries at par, then deploy that capital into European fund commitments at attractive terms. They're selling mature US positions while accessing European opportunities at earlier vintage years with potentially higher returns. LP-led secondaries have become particularly popular because they allow granular control over geographic exposure rather than accepting whatever mix a traditional fund provides.

Defense Infrastructure as Market Driver

European defense spending increases represent policy-driven opportunities with multi-year visibility. When countries allocate an additional 1-2% of GDP to defense, that translates to roughly $350 billion annually across Europe. The "Golden Dome" missile defense initiative alone represents $175 billion in contracts over three years.

Firms with capabilities in manufacturing and supply chain management are finding entry points through defense contractors' commercial subsidiaries. These companies often serve both military and civilian markets, providing natural diversification. The defense build-out also creates downstream opportunities in industrial services, logistics, and technology infrastructure.

The convergence of these factors—currency dynamics, operational flexibility, secondaries liquidity, and policy support—creates what institutional investors call "the geographic premium." It's the additional return generated by positioning capital where market shifts create pricing opportunities.

🧰 TACTICAL TAKEAWAYS

• Position for the Liquidity Rotation. With secondaries fundraising up 30.9% year-over-year, LPs have options. Consider keeping powder dry for GP-led opportunities in assets rather than rushing into blind pools.

• Embrace Volatility as a Value Driver. Tariff uncertainty has created valuation disparities in years. Focus on middle market opportunities with cross-border exposure - think US-based manufacturing and services.

• Make AI Operational, Not Optional. 87% of businesses using AI report revenue improvements. Portfolio companies without AI integration strategies risk being left behind. Start with automation, not moonshots.

🗳️ COMMUNITY POLL

🧵 WEEKEND READS

(Because some light market analysis pairs wonderfully with Saturday coffee)

• 📉 Ray Dalio's 'worse than a recession' caution has some edgy — here's his 'Holy Grail' of strategies in a crisis - Bridgewater's founder warns of potential economic turmoil beyond recession, emphasizing his diversification strategy of finding 10-15 uncorrelated return streams to improve risk-adjusted returns by a factor of five.

• 🚪 Private Equity's IPO Exit Doors Expected to Open Wide in Second Half - PE-backed companies account for roughly half of the 200 firms in the "shadow pipeline" ready to go public, with Roark Capital's Inspire Brands and Blackstone's Medline Industries among those expected to debut. The twist? 30% of PE's 30,000 portfolio companies have been held for five years or more.

• 🇮🇳 From UPI to AI: India's digital leap creates rich ground for private equity play - India's digital economy could grow 10x in the next decade, from $300-400 billion to $3 trillion, driven by digital infrastructure like UPI payments and the country's 17,000 AI specialists. Gaja Capital's Gopal Jain calls India tech the next "big" opportunity after the US and China.

👋 WANT IN?

In these turbulent times, understanding the nuances of private market investments is more crucial than ever. Schedule a discovery call with OneFund further discuss private equity and the current market.

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The OneFund Team

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