general partners | Pension360

LACERA Raises Private Equity Target, But Fulfilling It Will Be Challenge

The Los Angeles County Employees Retirement Association in 2014 increased the amount of money it plans to invest in private equity this year, from $1.8 billion to $2 billion.

Over the next few years, the fund plans to bring its target PE allocation up to 11 percent of its portfolio, up from 8.7 percent in 2014.

But raising the target allocation is easy. Fulfilling it will be more challenging, as many pension funds, including LACERA, found out in 2014.

From the Wall Street Journal:

[LACERA] fell short of its private equity pacing target in a year when a record number of funds reached their hard caps and investors were forced to scale back commitments or were turned away at the door.

“Certain realities exist in the current private equity environment that challenge staff’s ability to effectively deploy $1.8 billion to $2.0 billion of capital annually,” a memo penned this month from investment staff to trustees and reviewed by Dow Jones stated.

That’s how much Lacera projects is needed in private equity commitments each year for it to grow its private equity allocation to a targeted 11% of its portfolio mix in the next four to five years. The pension system had 8.7% of its portfolio in private equity holdings as of Sept. 30. The pension fund has in the past stressed that it does not want to “dilute the quality of general partner relationships nor the thoroughness of the due diligence process just to hit the target.”

Lacera’s combined commitments in 2014 fell short of its projected pacing figure, but reflects the pension fund’s goal “to not dilute the quality of general partner relationships nor the thoroughness of the due diligence process just to hit the target.”

LACERA manages $47 billion in assets.

Photo jjMustang_79 via Flickr CC License

Recruiting Private Equity Talent Getting More Expensive For Pension Funds

As more pension funds participate in direct investing or co-investing ventures, they find the need for private equity experts on their staff.

But the cost of getting that talent is growing: a recent survey found that almost 50 percent of pension funds are having to shovel out higher salaries to recruit and retain private equity employees.

From the Financial Times:

Private equity employees are commanding higher wages as increasing amounts of money are pushed into the asset class.

Almost half of North American limited partnerships (pension funds and funds of funds) are having to increase their pay scales to recruit staff, according to a survey of 114 investors and private equity funds by Coller Capital, which invests in the secondary private equity market. The European market lags behind somewhat, with 30 per cent of LPs increasing salaries.

“The industry has done very well over the past couple of years, with very strong distribution,” said Michael Schad, a partner at Coller Capital. “As there is more demand from employers, wages can go up.”

As well as the industry expanding, investors are entering more directly into the asset class, either co-investing with general partners or building their own private equity investment capabilities. “This requires different skill sets,” said Mr Schad.

The survey also asked where funds were looking to recruit PE employees:

While more than half expect to recruit employees from other LPs, almost as many (46 per cent) will look for talent at alternative asset managers that are not private equity firms. A third will take on former investment bankers, but just a quarter hope to attract workers from general partners (private equity firms).

Increasing remuneration may be good news for the LPs, according to remarks made by Klaus Ruhne, partner at ATP Private Equity Partners, during a round-table held by private equity consultant Triago in November.

“What is more important than the size of teams, or the value of assets under management, is the frequent lack of generous long-term incentive plans for limited partners,” he said. “Without a restructuring of LP compensation, we will continue to witness an inordinate amount of inconsistency and even foolishness when it comes to how capital is deployed and how limited partners are organised.”

The survey was conducted by Coller Capital.

Photo by 401kcalculator.org

Preqin: More Pensions Invested in Private Equity, But Average Allocation Down From 2013

Data from Preqin shed some light on private equity activity in 2014, and showed that more public pension funds invested in private equity in 2014.

Even still, public pensions’ average allocation to private equity has dipped slightly since 2013.

From ThinkAdvisor:

Preqin, the investment alternatives data provider, found that the number of active U.S.-based public pension funds in private equity has risen year over year, from 266 in 2010 to 299 in October 2014. The average allocation to private equity was 7% as of October 2014, down from 7.2% a year earlier.

Preqin said private equity looked set to remain an important component of U.S.-based public pension funds’ portfolios for years to come, offering investors good portfolio diversification and outsized returns over the long term.

Fundraising for the year was likely to be strong, Preqin reported, with $254 billion raised by funds that closed in the first half.

A record 2,205 funds are currently in the market seeking an aggregate $774 billion, compared with 2,098 funds that were looking to raise $733 billion in January.

Preqin also reported that its internal data showed co-investment would increase in 2014. It acknowledged that concerns about high expenses and competition were holding back some general partners from offering co-investment opportunities. But researchers found that co-investment figured prominently in the plans of many GPs and limited partners.

Preqin said that as the private equity industry matures and investors become more sophisticated, co-investment activity could increase, with benefits for both fund managers and limited partners.

Preqin also found that venture capital funds raised more money in 2014 than in 2013.

Photo by jjMustang_79 via Flickr CC License

Private Equity Firm Allows Investors to Hire Advisor to Monitor Governance, Review Financial Records

A New York Times report over the weekend posed the question: is private equity becoming less private?

One private equity firm, Freeman Spogli & Company, recently revealed that it allowed investors in one of its funds to hire an outside adviser to “monitor the fund’s practices”.

Investors in the fund include several of the country’s largest pension funds, including the New York State Common Retirement Fund.

From the New York Times:

Is private equity about to get a little less private?

Perhaps so, judging by the decision of a venerable private equity firm to allow investors in one of its funds to hire an independent adviser to monitor the fund’s practices. Beyond reviewing the books and financial records at the fund, the outside adviser would also be permitted to scrutinize the fund’s governance practices for conflicts of interest, the firm said.

This shift in practice, which has not been previously reported, was disclosed to investors in June by Freeman Spogli & Company, a $4 billion private equity firm created more than 30 years ago, in a letter laced with legal jargon that obscured the import of the decision.

The new policy applied to the firm’s newest fund: FS Equity Partners VII, which opened for investment this year and has closed with $1.3 billion in committed funds. Investors in that fund include pension funds and public investments, such as the Kansas Public Employees Retirement System, the New Mexico State Investment Council and the New York State Common Retirement Fund.

[…]

Allowing the appointment of a monitor is no small matter. Giving an outsider routine access to internal fund operations is practically unknown in the $3.5 trillion private equity industry, where powerful firms operate in near secrecy and hold so much sway that many investors say they feel fortunate to be allowed to put money into the funds. The independent adviser will report to the fund’s investors.

Karl Olson is a partner at Ram, Olson, Cereghino & Kopczynski who has sued the California Public Employees’ Retirement System, known as Calpers, to force it to disclose fees paid to hedge fund, venture capital and private equity managers. He said he had never seen a provision allowing an independent monitor at a private equity fund.

“It does seem like a step in the right direction because too often the limited partners are unduly passive,” he said, referring to investors. “They should feel they are in the driver’s seat and that they have an obligation to drive a hard bargain with the funds.”Phone calls seeking comment at both the New York and Los Angeles offices of Freeman Spogli were not returned.

The NY Times report speculates that the firm may have allowed the hiring of the independent adviser after the SEC began asking questions about “several of the firm’s practices”.

General Partners Gain Upper Hand Over Pension Funds As Raising Capital Becomes Easier

Pensions & Investments released an interesting report yesterday outlining the balance of power in the private equity world between general partners and pension funds.

In the last few years, the balance of power has shifted dramatically towards GP’s, according to the report.

From Pensions & Investments:

Until the 2008 financial crisis, general partners pretty much set the rules, leaving most limited partners little say on terms, including on fees and expenses, when they committed to funds. Then fundraising got harder, and even the most popular private equity managers had to accept investors’ demands for lower fees and expenses and a greater degree of transparency.

Now, the highest-returning general partners are regaining the upper hand.

“Certainly, the pendulum has swung more toward the GP compared to 2009,” said Kevin Campbell, managing director and portfolio manager in the private markets group at fund-of-funds manager DuPont Capital Management, Wilmington, Del. The firm was spun out from the pension management division of DuPont’s pension plan in 1993.

[…]

Said DuPont’s Mr. Campbell: “I’ve seen the pendulum of power change positions several different times during the last 15 years,” where private equity fund terms are determined by the GP and sometimes they are more influenced by the LP.

Strong-performing managers that retain the same team and the same investment strategy used when they earned their strong returns have the most influence over fund terms, Mr. Campbell said. These managers also are raising a fund that is similar in size to their last fund and they have a “good investor base,” meaning investors who routinely commit to their funds, he said.

[…]

Some are increasing their negotiating clout by getting large capital commitments from sovereign wealth funds before the first close, enabling them to give other interested institutional investors a take-it-or-leave-it deal, said Stephen L. Nesbitt, chief executive officer of Marina del Rey, Calif.-based alternative investment consulting firm Cliffwater LLC.

Part of the reason GPs have power over LPs has to do with fundraising. GPs are having an easy time raising capital, which means they don’t have any incentive to negotiate terms with LPs. From P&I:

It’s easier to raise capital now; funds are raised more quickly and general partners have more influence on terms, he added.

Indeed, some private equity funds are closing very quickly, with access to much more capital than they need. Instead of holding several fund closings — giving general partners the ability to invest the capital commitments before the final close — a number of firms are having “one-and-done” closings. Because there are asset owners willing to invest on those terms, the GPs have little reason to give in to limited partners demanding changes to fund terms.

For example, Veritas Fund Management in August held a first and final close at $1.875 billion for its latest middle-market private equity fund, after just three months of fundraising. And private equity real estate manager Iron Point Partners LLC in November closed the Iron Point Real Estate Partners III LP at $750 million, well above its $450 million target.

And KPS Capital Partners LP held a first and final closing last year of its $3.5 billion KPS Special Situations Fund IV, above its $3 billion target. It was KPS’ third oversubscribed institutional private equity fund, according to a statement from the firm at the time.

Read the full report here.

Exploring the Relationship Between Pension Funds and Private Equity Firms

Finance blog Naked Capitalism has published a long interview with Eileen Appelbaum and Rosemary Batt, authors of Private Equity at Work, a book that dives into the inner-workings of the PE industry.

Part of the Naked Capitalism interview, conducted by Andrew Dittmer, covers the relationship between limited partners (pension funds) and general partners (PE firms). Here’s that portion of the interview:

Andrew Dittmer: In general, LPs seem to have a pretty submissive attitude toward GPs. Where do you think this attitude comes from?

Rosemary Batt: One cause is the difference in information and power. Many pension funds don’t have the resources to hire managers who are sophisticated in their knowledge of private equity firms. They don’t have the resources to do due diligence to the extent they would like to, so they need to rely on the PE fund, essentially deferring to them in what they say.

Eileen Appelbaum: I think that there is a reluctance to question this information or to share it with other knowledgeable people – they are afraid that if they do, they will not be allowed to invest in the fund because the general partners will turn them away.

I attended a lunchtime lecture recently, the title of which was “How is it that private equity is the only industry in which 70% of the firms are top-quartile?”The general partners have found ways to persuade their investors that they are the top-quartile funds, that “you will make out best if you invest with us,”and “we’re very particular – if you can’t protect our secret sauce, we aren’t going to do business with you.”

The other side of it is that some of the pension funds have their own in-house experts, and some of them believe they’re smarter than the average bear – there’s a certain pride in their ability to get the best possible deal, better than other LPs can get.

It’s the lack of transparency. With more transparency we’d have a lot less of these problems.

Rosemary Batt: Another issue is yield – often they’re thinking, “We need to be investing in private equity or alternative investment funds because this is the only way to get higher yields.” There’s a kind of halo effect, if you will, around the private equity model – many people think it really does produce higher returns without really having the knowledge. In some cases, there are political battles that have to be fought to get legislators to make a decision not to invest in these funds.

Eileen Appelbaum: Often the person who is appointed to make the decisions about private equity investments comes from Wall Street, maybe even from a PE background.

[…]

Eileen Appelbaum: Rose and I did a briefing at the AFL for the investment group. We had investment people from both union confederations who are concerned about the fact pension funds are putting so much money into private equity. They told us that they had never been able to see a limited partner agreement until Yves Smith published them. The pension fund people are so afraid of losing the opportunity to invest in PE. Some general partner could cut them off for having shared the limited partner agreement. Unbelievable.

This is the only section of the interview that deals explicitly with pension funds, but the whole interview is worth reading. You can read it here.