private equity firms

Private Equity Eyes Longer Timelines For Largest Investors

Some private equity firms are considering offering new investment structures that would allow their largest clients to invest over a longer period of time, according to a New York Times report.

The new structure would extend the timeline of some investments to over 10 years, which could appeal to institutional clients looking for longer-term, lower-risk investments in the private equity arena.

More details from the New York Times:

Joseph Baratta, the head of private equity at the Blackstone Group, the biggest alternative investment firm, said at a conference in Berlin on Tuesday that the firm was speaking with large investors about a new investment structure that would aim for lower returns over a longer period of time.

Mr. Baratta, whose remarks were reported by The Wall Street Journal, said the investments would be made outside of Blackstone’s traditional funds, which impose time limits on the investing cycle. Invoking Warren E. Buffett’s Berkshire Hathaway, Mr. Baratta said he wanted to own companies for more than 10 years.

”I don’t know why Warren Buffett should be the only person who can have a 15-year, 14 percent sort of return horizon,” Mr. Baratta said, according to The Journal.

His remarks, at the SuperReturn International conference, were only the latest example of chatter about this sort of structure in private equity circles.

News reports last fall said that Blackstone and the Carlyle Group, the private equity giant based in Washington, were both considering making investments outside their existing funds. Such moves would let the firms buy companies they might otherwise pass on — big, established corporations that don’t need significant restructuring but could benefit from private ownership.

[…]

Blackstone, which has not yet deployed such a strategy, might gather a “coalition of the willing” investors to buy individual companies, Mr. Baratta said. This approach could be attractive to some of the world’s biggest investors, including sovereign wealth funds and big pension funds, which, though they want market-beating returns, also want to avoid taking too much risk.

Read the full NY Times report here.

Photo by Santiago Medem via Flickr CC

Study: Pensions Put Pressure on Private Equity to Formulate Environmental, Social Investment Policies

Research from the London Business School shows that the vast majority of large private equity firms – 85 percent – are feeling increased pressure from Europe’s institutional investors to incorporate environmental, social and governance (ESG) considerations into their investment policies and processes.

Details from Investments & Pensions Europe:

The study was based on responses from 42 private equity firms with collective assets under management of more than $640bn.

“Issues such as climate change, sustainability, consumer protection, social responsibility and employee engagement are no longer viewed solely as components of risk management, but have also gained recognition in recent years as important drivers of firm value, particularly in the long term,” the study said.

[…]

But even though ESG policies were being adopted more and more, there were still some big obstacles to these being implemented, the study showed.

The most notable barrier was the difficulty in collecting the necessary data, it said.

Also, some respondents cited the attitude of internal managers as a barrier to implementation.

“It appears that, while ESG integration has become common, there remain pockets of internal managerial resistance to the whole idea of considering such issues as relevant for investment decisions,” the study said.

[…]

Ioannis Ioannou, assistant professor of strategy and entrepreneurship at the London Business School, said: “The private equity industry is increasingly placing greater importance to ESG, moving it from a purely compliance and risk mitigating strategy to a key long-term strategy through which private equity firms pursue value creation.”

Read the research report here.

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Will Pension Funds Have to Foot Bill For PE Firms in Collusion Settlement?

In September, seven investment firms ended a years-long lawsuit by agreeing to a $590 million settlement with corporate shareholders who were accusing the firms of colluding to keep prices down during the “buyout boom”.

But for pension funds, the ramifications of the settlement are just beginning as they wonder how the costs of the settlement will be divided among the investment firms and their limited partners.

From the Wall Street Journal:

The California State Teachers’ Retirement System is in ongoing discussions with private equity firms involved in a collusion case about how the costs of the settlements will be shared with limited partners, said Christopher J. Ailman, the pension system’s chief investment officer.

At the center of these discussions is where the responsibility for making the settlement payments lies–in the funds from which the firms made the investments or the firms themselves–and if both are responsible, how the payments and related legal fees should be split.

“That’s still being discussed,” said Mr. Ailman. “Different firms are taking different tacks.”

[…]

Mr. Ailman called the suit “frustrating” and blamed the case on the practice of frivolous lawsuits being made against corporate acquirers.

“It’s disappointing that there are still lawyers chasing after these funds,” said Mr. Ailman, adding that the collusion suit, “in particular, is frustrating because we think it’s without merit.”

Mr. Ailman said that in general, fund documents stipulate clearly that any legal expenses related to fund investments should be covered by the fund. But that shouldn’t entirely absolve the private equity firm that manages the fund because as the general partner, the firm has a fiduciary duty toward its investors.

“I always say to my GPs that ‘What’s written there is the bottom-line agreement,’” said Mr. Ailman. “‘We [also] shook hands and have an intellectual agreement. You are my agent. You are the fiduciary to us. We invest together.’”

More background on the settlement, from the WSJ:

The lawsuit, filed by certain shareholders of companies that were acquired during last decade’s buyout boom, alleged that the firms-Blackstone Group, Kohlberg Kravis Roberts & Co., TPG Capital, Carlyle Group, Bain Capital, Goldman Sachs Group Inc. and Silver Lake-colluded to keep prices down while bidding for companies during that time frame.

By early September, all seven firms had settled with the plaintiffs, ending a seven-year litigation process and making the firms liable for a total of $590.5 million in settlement payments.

All the firms in the lawsuit denied wrongdoing and said they decided to settle the case to avoid further distraction and litigation expenses.

Pension Funds Criticize Excessive Private Equity Fees; More Look To Direct Investing

Pension fund officials from Canada and the Netherlands expressed their frustration with private equity fees during a conference this week.

The chief investment officer of the Netherlands’ $220 billion healthcare pension fund said it needs “to think about” the fees it is paying, according to the Wall Street Journal.

Ruulke Bagijn, chief investment officer for private markets at Dutch pension manager PGGM, said a Dutch pension fund for nurses and social workers that she invests for, paid more than 400 million euros ($501.6 million) to private-equity firms in 2013. The amount accounted for half the fees paid by the PFZW pension fund, even though private-equity firms managed just 6% of its assets last year, she said.

“That is something we have to think about,” Ms. Bagijn said.

Among the things pension officials are thinking about: bypassing private equity firms and fees by investing directly in companies. From the Wall Street Journal:

Jane Rowe, the head of private equity at Ontario Teachers’ Pension Plan, is buying more companies directly rather than just through private-equity funds. Ms. Rowe told executives gathered in a hotel near Place Vendome in central Paris that she is motivated to make money to improve the retirement security of Canadian teachers rather than simply for herself and her partners.

“You’re not doing it to make the senior managing partner of a private-equity fund $200 million more this year,” she said, as she sat alongside Ms. Ruulke of the Netherlands and Derek Murphy of PSP Investments, which manages pensions for Canadian soldiers. “You’re making it for the teachers of Ontario. You know, Derek’s making it for the armed forces of Canada. Ruulke’s doing it for the social fabric of the Netherlands. These are very nice missions to have in life.”

But an investment firm executive pointed out that direct investing isn’t as cost-free as it sounds. From the WSJ:

[Carlyle Group co-founder David Rubenstein] warned that investors who do more acquisitions themselves rather than through private-equity funds will have to pay big salaries to hire and retain talented deal makers.

“Some public pension funds will just not pay, in the United States particularly, very high salaries and will not be able to hold on to people very long and get the most talented people,” Mr. Rubenstein said at the conference. “I don’t think there are that many people who will pay their employees at these sovereign-wealth funds and other pension funds the kind of compensation necessary to hold on to these people and get them.”

[…]

Mr. Rubenstein had a further warning for investors seeking to compete for deals with private-equity firms. “If you live by the sword you die by the sword,” he said. “If you are going to do disintermediation you can’t blame somebody else if something goes wrong.”

Pension360 has previously covered how pension funds are bypassing PE firms and investing directly in companies. One such fund is the Ontario Municipal Employees Retirement System. The fund’s Euporean head of Private Equity said last month:

“The amount of fees that we were paying out for a fund, 2 and 20 [percentage points] and everything that goes with that, was a huge amount of value that we were losing to the fund,” Mr. Redman said. “If we could deliver top quartile returns and we weren’t hemorrhaging quite so much in terms of fees and carry that would mean that we would be able to meet the pension promise.”

Photo by http://401kcalculator.org via Flickr CC License

CalSTRS Doubles Down On Clean Energy Investments

At least one pension fund is seeing the potential for “green” (read: big money) in clean energy investments.

CalSTRS announced plans to significantly ramp up investments in the “green” sector from $1.4 billion to $3.7 billion over the next 5 years. AP reports:

CalSTRS CEO Jack Ehnes says the pension fund is seeing more opportunities in low-carbon projects and technologies. The fund is hoping also to help push for stronger policies aimed at fighting climate change, Ehnes says.

If policies are adopted that impose a price on carbon emissions to discourage pollution, the fund could increase its investments further, to $9.5 billion.

The fund has a $188 billion portfolio.

The clean energy and technology investments will be made through holdings in private equity firms, bonds, and infrastructure as suitable investments come available, the fund says.

The move comes on the heels of calls in recent years for pension funds to divest from fossil-fuel dependent investments. From the Financial Times:

At least 25 cities in the US have passed resolutions calling on pension fund boards to divest from fossil fuel holdings, according to figures from 350.org, a group that campaigns for investors to ditch their fossil fuel stocks.

Three Californian cities, Richmond, Berkeley and Oakland, urged Calpers, one of the largest US pension schemes, with $288bn of assets, and which manages their funds, to divest from fossil fuels. Calpers has ignored their request.

Calpers said: “The issue has been brought to our attention. [We] believe engagement is the best course of action.

No pension funds have yet divested from fossil fuel-dependent investments for social reasons, including CalSTRS.

But you can expect pension funds to go where they think the money is; in the case of CalSTRS, they are seeing “green” in clean energy going forward.

Photo: Paul Falardeau via Flickr CC License