private equity investment | Pension360

New York Pension Commits $50 Million to Local Private Equity

New York’s Common Retirement Fund has announced an additional $50 million will be invested in local private equity through the pension fund’s In-State Private Equity Investment Program.

Through the In-State Program, which started in 2000, the Common Retirement Fund invests in New York-based companies. Graycliff Partners will manage the new commitment.

From a press release:

“The In-State Private Equity Investment Program is proof that investing strategically in New York companies produces results,” said DiNapoli. “The program has returned nearly $300 million to the state pension fund and supported thousands of jobs across the state. This $50 million commitment to Graycliff will help to keep the state pension fund strong for the more than one million retirement system members and retirees as well as promote growth in our local economies.”

The In-State Private Equity Program is designed to meet fiduciary standards and provide investment returns to the state pension fund consistent with the risk of private equity. The program invests in New York State-based companies seeking capital for growth, to refinance ownership or for early stage investment. The program has returned $293 million to the state pension fund on 71 exited investments.

As of September, the state pension fund has invested $760 million in 292 companies and helped to create or retain nearly 4,000 jobs. Comptroller DiNapoli has more than doubled the pension fund’s commitment by adding $749 million to the In-State Program. Since 2007, three new managing partners have been added to oversee the program’s investments including Graycliff in 2014, Contour Venture Partners in 2011 and DFJ Gotham in 2009.

“Graycliff Partners has a long history of investing in and growing lower middle market businesses by supporting strong management teams and providing strategic and financial guidance,” said Andrew Trigg, managing director for Graycliff Partners. “We view New York State as a region with a great depth and diversity of corporate and entrepreneur-owned businesses poised for expansion and crucial to economic development in the state.”

The state pension fund selected Graycliff as a managing partner for the In-State Program in October, increasing the total number of partners to 19. The New York City-based firm will invest in buyout and growth equity transactions across the state.

The Common Retirement Fund manages $180 billion in assets for New York’s largest state-level retirement systems.

Report: Pension Funds Agreed To Risky, “Unusual” Contract Clause When They Invested in Vista Private Equity Fund

Vista Equity Partners has written an “unusual” clause into their contracts with limited partners, which include some major pension funds.

When pension funds invest with private equity firms, they sign “limited partnership” agreements. But a Reuters report says a certain clause included in Vista contracts is “atypical” for the industry, and potentially shifts more risk onto limited partners.

Details on the clause, from Reuters:

Vista Equity Partners has worked in an unusual clause in its contracts with private equity fund investors that gives it more financing flexibility and a leg up in leveraged buyouts, but also carries more risks for it and its investors, according to people familiar with the matter.

The agreement allows Vista to temporarily finance large corporate buyouts just with the cash from its $5.8 billion fund, as against using both debt and equity to buy companies. Under the right circumstances, this flexibility allows Vista to be nimble in auctions and secure the best possible debt financing after it has clinched a deal.

Two months ago, Vista used the clause in one of the largest private equity deals of the year, committing to fund the $4.2 billion takeover of TIBCO Software Inc with equity. One day later, it secured debt commitments from JPMorgan Chase & Co and Jefferies LLC for the deal, reducing its equity exposure to $1.6 billion.

The maneuver helped it not only outbid rival Thoma Bravo LLC in the TIBCO auction, but also use JPMorgan and Jefferies, which where were originally backing Thoma Bravo during the auction and were offering better financing terms, the sources said.

Investors in the Vista fund, known as limited partners, include some of the largest U.S. public pension funds, including the New Jersey State Investment Council and the Oregon Public Employees Retirement Fund. These funds do not disclose to their members and retirees all the risks they undertake, because the agreements with Vista and other private equity firms are confidential. The revelations highlight how important aspects of the investment of public money in private equity are shrouded in secrecy.

Industry insiders told Reuters that the clause is “highly atypical”:

Several pension fund investors, private equity placement agents and lawyers interviewed by Reuters said Vista’s terms are highly atypical and not widely known even within the private equity industry. Most firms have caps – usually around 15 to 20 percent of the fund – on how much equity they can commit to a particular deal. Private equity funds also rarely make all-equity commitments for such deals, preferring to tie up debt financing ahead of time. When they do make such all-equity commitments, the equity checks tend to be much smaller.

The reason is that doing so poses the risk that investors see their entire capital tied up in one investment, potentially hurting returns and denying them the benefits of diversification, these industry sources said.

Such a situation can arise, for example, if the debt market conditions were to suddenly sour, as it happened in the summer of 2007 before the financial crisis. In the TIBCO deal, Vista’s financial liabilities are capped at $275.8 million. But if the banks walk away before the deal closes, TIBCO can try to force Vista to close on the deal with its fund.

“It’s a bit like walking on a wire without a net,” said Alan Klein, a partner at law firm Simpson Thacher & Bartlett LLP.

Public pension funds that have invested in Vista funds include the Oregon Public Employees Retirement Fund, the Virginia Retirement System, the Michigan Retirement System, the Arizona Public Safety Personnel Retirement System and the Indiana Public Retirement System.

Photo by Juli via Flickr CC License

Canada Pension Plan Among Bidders For $10 Billion of Cement Facilities

The Canada Pension Plan (CPP) has teamed up with Blackstone Group and Cinven to bid on $10 billion of cement assets that are being sold as a result of a pending merger between two major building material suppliers.

The CPP is one of 60 parties who have placed bids.

From the Wall Street Journal:

Private-equity firms are jostling to acquire more than $10 billion of cement facilities being sold as part of the merger of two large European companies, reflecting the dearth of buyout deals available in the region.

The sale of the cement assets in Europe, Canada, Brazil and the Philippines are a precondition to winning antitrust approval of a $50-billion merger between French cement giant Lafarge SA and Swiss rival Holcim Ltd.

The assets have attracted interest among cash-flush private-equity firms. Some 60 parties, a mixture of buyout firms and building-materials companies, have submitted bids for all or some of the assets, said Holcim finance chief Thomas Aebischer. Private-equity bidders include Blackstone Group, KKR & Co. and other top firms, according to people familiar with the matter.

[…]

The cement deals are “sort of classic private-equity assets,” said Josh Lerner, a professor at Harvard Business School, of the Holcim and Lafarge sales. “The idea of a transaction that has the classic PE kind of recipe, where this is a mature industry, is a good thing for them.”

The deal is also attractive because it could create an entirely new cement rival overnight. Some argue creating a new company with the assets could be a challenge for buyers, since the facilities are spread across the globe and aren’t independent companies at this stage.

The $10 billion price-tag on the for-sale assets is too big for many private-equity firms to digest on their own. Many are forming groups to bid for the assets, a practice they have moved away from in recent years since investors prefer to spread their money among several funds invested in different assets.

Among the private-equity bidders are: a group consisting of Blackstone Group, Cinven and the Canada Pension Plan; BC Partners and Advent International; Bain Capital and Onex Partners; and KKR., according to the people familiar with the matter. Industry bidders include Irish cement maker CRH PLC, according to people familiar with the matter. The structure of the consortia could still change, said one person familiar with the deal.

The Canada Pension Plan has $227 billion in assets, which are managed by the Canada Pension Plan Investment Board.

Photo by Parée via Flickr CC License

HarbourVest May Be Last Party Interested in Buying CalPERS’ Stake in Under-Performing Healthcare Fund

CalPERS announced this summer it was looking to exit the Health Evolution Partners (HEP) Growth Fund, a private equity fund specializing in healthcare companies.

HEP is run by David Brailer, a world-renowned physician who had no previous private equity experience before starting the firm.

The fund promised returns of 20 percent. But its IRR as of March 31 was just 2 percent.

According to Reuters PE Hub, HarbourVest Partners is interested in buying CalPERS’ stake in the fund. From Reuters PE Hub:

HarbourVest Partners appears to be the last bidder interested in buying CalPERS’ stake in a healthcare fund run by a former Bush Administration official, according to two sources.

The California Public Employees’ Retirement System since summer has been trying to sell its stake in a growth fund managed by Health Evolution Partners (HEP). Evercore Partners is running the sales process, sources said.

Landmark Partners was also a bidder until recently, a secondary market professional said.

CalPERS is the sole limited partner in the fund and committed $505 million at its inception in 2008. So far, the GP has drawn down just over $430 million, as of March 31, according to CalPERS.

The fund’s performance has not been stellar. It produced an internal rate of return of 2 percent and a 1x multiple as of March 31, according to CalPERS.

One secondary market professional said bad blood between CalPERs and HEP likely drove away some potential buyers.

Real Desrochers, senior investment officer for CalPERS’ Private Equity Program, recommended the retirement system get out of the investment because he didn’t believe HEP would achieve its goal of a 20 percent IRR, Pensions & Investments reported in August. CalPERS investment staff earlier this year refused to allow HEP to use already-committed capital and told the firm to find a new partner or face liquidation, P&I reported.

[…]

Besides the growth fund, CalPERS committed $200 million to an HEP fund-of-funds in 2007. The sales process has not included the FoF, which had produced a negative 3 percent IRR and a 0.9x multiple as of March 31.

Read more coverage of the HEP Growth Fund here.

Photo by Hobvias Sudoneighm

Lowenstein: Do Pension Fund Make Investing Too Complex?

Former New York Times financial writer Roger Lowenstein wonders in his new Fortune column whether pension investments have become too complex.

Lowenstein’s thesis:

Pricey consultants have convinced many pension funds to pile into private equity, real estate and hedge funds, which don’t necessarily promise higher returns or long-term investing.

[…]

[Pension funds] have assembled portfolios that are way too complex, way too dependent on supposedly sophisticated (and high fee) investment vehicles. They have chased what is fashionable, they have overly diversified, and they have abandoned what should be their true calling: patient long-term investing in American corporations.

[…]

It’s true that the stock market doesn’t always go up. But a long-term investor shouldn’t be wary of volatility. Over the long term, American stocks do go up. And state pension systems should be the ultimate long-term investors; their horizon is effectively forever.

Lower volatility helps fund managers; they don’t like having to explain what happened in a bad year. But it is not good for their constituents. The Iowa system has trailed the Wilshire stock index over 10 years—also over five years, three years, and one year. Over time, that translates to higher expenses for employees or for Iowa taxpayers. And Iowa is typical of public funds generally.

[…]

Many hedge funds trumpet their ability to dampen volatility. Pension funds should not be in them. From 2009 to 2013, a weighted index of hedge funds earned 8% a year, according to Mark Williams of Boston University. The return on the S&P 500 was more than twice as much, and a blended 60/40 S&P and bond fund earned 14%. Granted, a small minority of hedge funds consistently beat the index. But most public pensions will not be in such superlative funds.

Lowenstein on private equity:

Private equity remains the rage. However, private equity is hugely problematic. Those confidential fees are often excessive—with firms exacting multiple layers of fees on the same investment.

Moreover, there is no reliable gauge of returns. Private equity firms report “internal rates of return.” These do not take into account money that investors commit and yet is not invested. “The returns are misleading,” says Frederick Rowe, vice chairman of the Employee Retirement System of Texas. “The professionals I talk to consider the use of IRRs deceptive. What they want to know is, ‘How much did I commit and how much did I get back?’”

Since no public market for private equity stakes exists, annual performance is simply an estimate. Not surprisingly, estimates are not as volatile as stock market prices. But the underlying assets are equivalent. A cable system or a supermarket chain does not become more volatile by virtue of its form of ownership.

The fact that reported private equity results are less volatile pleases fund managers. But the juice in private equity comes from its enormous leverage. Pension managers would be more honest if they simply borrowed money and bet on the S&P—and they would avoid the fees. And if high leverage is inappropriate for a public fund, it is no less inappropriate just because KKR is doing it.

Lowenstein ends the column with a call for pension funds to renew their focus on “long-term goals”:

With their close ties to Wall Street, pension managers tend to be steeped in the arcane culture of the market. The web site for the Teacher Retirement System of Texas refers to its “headlight system” of “portfolio alerts” and the outlook for the U.S. Federal Reserve and China.

Managers who think in such episodic terms tend to be traders, not investors. This subverts the long-term goals of retirees.

The focus on the short and medium term squanders what a pension fund’s true advantage is. You may not have thought that public funds had an advantage, but they wield more than $3 trillion and have the freedom to invest for the very long term.

Better than chase the latest “alternative,” pensions could become meaningful stewards of corporate governance—active monitors of America’s public companies. A few fund managers, including Scott Stringer, the New York City comptroller, who oversees five big funds, are moving in this direction, seeking board roles for their funds. More should do so, but that will require an ongoing commitment. It will require, in other words, that pension funds stop acting like turnstile traders and fad followers, and that they start behaving like investors.

Read the entire column here.

Photo by Victoria Pickering via Flickr CC License

$200 Million To Asia Private Equity Among Series of Moves By Illinois Teachers’ Fund

The Illinois Teachers’ Retirement System (TRS) made a series of moves at Thursday’s board meeting that included making $300 million in commitments to two private equity funds and approving the hire of a firm to manage domestic stocks.

The system made several new commitments, including $300 million to two private equity funds, one focusing on Asia and the other on technology. From Pensions & Investments:

Siris Capital Group […] graduated from the emerging managers program with a commitment of $100 million to its technology-focused private equity fund, Siris Partners III. TRS invested $12.5 million in Siris Partners II.

TRS committed up to $200 million to a customized Asia-focused private equity strategy managed in a strategic partnership by Asia Alternatives Management. The allocation will be split evenly between a diversified fund of funds and a co-investment fund. The goal is to eventually move some of the Asian private equity managers from the fund of funds into TRS’ direct investment portfolio, Stefan Backhus, private equity investment officer, told trustees.

Taurus Funds Management, a new manager for the TRS, right, received a $30 million commitment to its Taurus Mining Finance Fund.

Active large-cap value equity managers Affinity Investment Advisors and Lombardia Capital Partners each received $25 million commitments from the emerging managers program for domestic and international portfolios, respectively.

Trustees ratified staff-initiated co-investments of $18.5 million and $20 million to existing managers Carlyle Group and Natural Gas Partners, respectively.

Funding for the Siris, Asia Alternatives, Taurus, Affinity, Lombardia, Carlyle Group and Natural Gas Partners hires will come from cash, index funds and rebalancing.

TRS also hired a new firm to manage domestic equities, promoted one other firm and fired another. From P&I:

Trustees of the $43.5 billion pension fund ratified the hire of LSV Asset Management by investment staff in August to manage $360 million in active domestic large-cap value stocks. LSV, which already managed $1.3 billion for TRS in two other equity strategies, replaced Loomis Sayles & Co., which was terminated in August.

Active bond manager Garcia Hamilton & Associates, was promoted from the pension fund’s $732 million emerging managers program to manage a 4% allocation from the fund’s $7.7 billion fixed-income portfolio. The $61 million Garcia Hamilton previously managed will be returned to the emerging managers program. Funding for the new account will come from reducing Prudential Asset Management’s core-plus bond portfolio and rebalancing among other fixed-income managers.

[…]

In further changes to the fixed-income portfolio, Hartford Investment Management was terminated as manager of a $350 million U.S. Treasury inflation-protected securities portfolio. Investment staff “believes the net-of-fees results from these mandates can be improved through two mandates. Further, staff prefers to utilize global inflation-linked mandates, while Hartford’s portfolio is U.S. only,” said R. Stanley Rupnik, chief investment officer, in an answer to a request for clarification.

The Illinois Teachers’ Retirement System manages $43.5 billion in assets.

Denmark Ramps Up Oversight Of Alternative Investments in Pension Systems

The entity that regulates Denmark’s financial system has announced plans to tighten oversight of alternative investments made by pension funds.

The move comes as regulators in the Financial Supervisory Authority have reported an uptick in risk, illiquidity and opacity in pension investments. From Bloomberg:

The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report.

The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016. The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions.

“The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”

Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.

[…]

Danish funds and insurers have overestimated the value of alternative investments they made while failing to adequately account for the risks, the FSA said in a February report.

Pension funds held 152 billion kroner ($26 billion) at the end of 2012, or about 7 percent of their balance sheets, in equity stakes and other assets sold on markets the FSA characterized as illiquid, opaque and thin. The agency said they need to account better for those risks and ordered reports from the third quarter. PFA, Denmark’s biggest commercial pension fund, said today it invested in a shopping mall in western Denmark as part of a strategy to increase its presence in retail properties.

Denmark’s pension systems hold $500 billion in assets, collectively.

Photo: “Dannebrog”. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

The Ten Pension Funds Getting Best Private Equity Returns

A new report from Bison and the Private Equity Growth Capital Council (PEGCC) ranked the ten pension funds seeing the best private equity returns over the last decade.

[List can be seen above.]

Some Pension Funds Want Longer Private Equity Deals; Funds Bypassing PE Firms To Avoid Fees

Private equity investments typically operate on a five-year timeline. But some pension funds are talking with private equity firms about longer-term deals. And at least one pension fund is cutting out the middleman and buying companies outright to avoid fees.

Reported by the Wall Street Journal:

Canada Pension Plan Investment Board is “open to conversations” with private-equity firms about partnerships to buy and hold companies for longer than the traditional five-year investment period, said Neal Costello, a London-based manager at the C$227 billion ($203 billion) pension fund.

Blackstone Group LP and Carlyle Group LP are among private-equity firms exploring how they can do longer-term deals with investors such as CPP and sovereign-wealth funds, people familiar with the firms have said.

Such deals could represent a major shift in the private-equity industry. The firms may use their own balance sheets rather than their funds to buy large companies with investors, people have said.

[…]

Large institutional investors are balking at paying expensive private-equity fund fees, and they are seeking to hold investments for longer. CPP is already buying companies outright, in addition to investing in private-equity funds and taking direct stakes alongside those funds. Earlier this year, it bought insurance company Wilton Re for $1.8 billion.

“That’s a very long-term asset,” Mr. Costello said Thursday at a conference in London organized by the British Private Equity and Venture Capital Association. “We can look at a 20-year investment period.”

Universities Superannuation Scheme, a London-based pension manager of £42 billion ($67.6 billion), would also consider longer-term deals in partnership with private-equity firms, according to Mike Powell, head of the private markets group at USS Investment Management.

“If we find good assets, we want to hold on to them as long as we can,” Mr. Powell said in an interview at the conference.

USS has already bypassed private equity and other fund managers entirely: It owns direct stakes in London’s Heathrow Airport and NATS, the U.K.’s air traffic service. Investing directly in infrastructure projects and companies is a way of avoiding paying high fees to fund managers, Mr. Powell said.

One problem that arises with a longer timeline is the issue of fees; most pension funds would balk at the additional expenses that accompany PE partnerships longer than five years. From the WSJ:

An obstacle to doing longer term deals with private-equity firms is figuring out how to pay the deal makers for such transactions, Mr. Powell said. Private-equity firms typically charge an annual fee of between 1% and 2% and keep 20% of profits when they sell a company, a model that won’t work if assets are held for many years.

“How do we remunerate them over the long term?” Mr. Powell said. “That’s up to Carlyle and Blackstone to come up with the answer.”

Ontario Municipal Employees Retirement System, a Canadian pension manager, has stopped investing in private-equity funds to avoid paying their fees, Mark Redman, the European head of its private-equity group said at the conference. The pension fund is buying companies directly instead.

The switch will benefit the pensions of the Canadian workers such as firefighters and policemen by saving them money, Mr. Redman said.

“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.”

Pension funds might have some leverage here — Pension360 has previously covered how PE firms want more opacity in their dealings with pension funds. The firms have been upset about the amount of private equity information disclosed by pension funds as part of public records requests.

Photo by 401kcalculator.org

CalPERS Chooses Firm to Manage $200 Million Private Equity Commitment

CalPERS announced Wednesday that it had chosen a firm to run its new $200 million private equity emerging manager commitment. The firm: GCM Grosvenor.

From Reuters:

Calpers said the new program would launch by the end of the year via a fund-of-funds vehicle. The pension fund would also invest $100 million in AGI Resmark Housing Fund, LLC, a San Francisco Bay Area-focused multi-family residential apartment development fund.

Calpers considers itself a leader in developing and implementing newly formed firms or firms raising first- or second-time funds, called emerging manager programs. Since 2010, the pension fund has committed $900 million to these types of funds.

Grosvenor, a large independent alternative asset management firm, manages approximately $47 billion in assets and multiple emerging manager programs for large institutional investors, including public pension plans and corporate plans.

San Francisco-based AGI Capital is an emerging manager-led real estate investment company that focuses on enhancing communities while delivering strong market returns for investors and partners.

CalPERS has invested $12 billion with emerging managers since 1991.

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