Chart: How Institutional Investors Are Changing Their Allocations to Alternatives in 2015

target allocations to alternative assets

Here’s a graphic that shows the percentage of institutional investors that are planning to change their target allocations to various alternative asset classes in 2015.

When it comes to increasing target allocations, 39 percent of institutional investors say they are going to increase their private equity investments in 2015.

Hedge funds may take the biggest hit; 34 percent of investors say they are decreasing their allocations to hedge funds in the coming year.

 

Chart credit: Coller Capital‘s Global Private Equity Barometer Winter 2014-2015

San Francisco Pension Approves 5 Percent Allocation to Hedge Funds

Golden Gate Bridge

After months of discussion and delays, the San Francisco Employees Retirement System on Wednesday voted to invest up to 5 percent of its assets in hedge funds.

The pension fund has not previously invested in hedge funds. Its investment staff had previously recommended a 10 and a 15 percent allocation, but the board voted 6-1 for a 5 percent investment.

More from SF Gate:

The staff, headed by William Coaker, who joined the pension system last February as chief investment officer, evaluated the new proposal and came up with another of its own, which was approved by the board.

It will reduce the target allocation for U.S. and foreign stocks to 40 percent from 47 percent, increase private equity investments to 18 percent from 16 percent, increase real assets including real estate to 17 percent from 12 percent, reduce bonds and other fixed income to 20 percent from 25 percent and increase hedge funds to 5 percent from zero.

It does not call for investing specifically in Bay Area real estate, which the fund already does to some extent.

[…]

Coaker said he wanted a stake in hedge funds to help reduce the portfolio’s volatility and prevent the steep losses suffered during the 2008 stock market crash. Its assets dropped from $17 billion before the crash to a low of $11 billion. To help make up the shortfall, the city and employees increased their contributions to the fund.

In a memo issued Wednesday, Coaker said the staff had “taken into account the concerns” of city workers and retirees, but said it still believes hedge funds “can play an important role to increase the stability of our funded status, improve our performance in down markets, reduce our beta (volatility), and increase or alpha (or excess returns over the broad market).”

The only board member who voted against the proposal was Herb Meiberger, who previously worked as a security analyst with the pension system. “I just don’t think this is the answer,” he said.

The San Francisco Employees’ Retirement System manages $20 billion in assets.

 

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Norway Pushes Pensions to Up Investments in Domestic Private Equity

Norway

A report released by the Norwegian government encourages the country’s pension funds to increase their investments in domestic private equity; the country is looking to boost the financing of its more innovative companies.

According to the report, interest in domestic private equity has fallen rapidly in the last eight years.

From Investments and Pensions Europe:

Norwegian pension providers should increase their exposure to domestic private equity to improve the country’s growth prospects, an in-depth government report has suggested.

According to the productivity commission, the state should also recognise that regulation has acted as a barrier to competition in the provision of public sector pensions, with the report pointing to the departure of DNB and Storebrand, leaving only KLP to bid for local authority provision.

The commission’s initial, 542-page report will now be examined by the government before a second paper puts forward concrete reform proposals on how the Norwegian economy should adapt as the role played by the oil industry declines.

It noted that there had been a marked fall in interest from domestic private equity funds since 2007, when the industry agreed to 160 first commitments.

The figure fell to just 15 a year by the end of 2013.

[…]

It concluded that there was room for long-term investors, including pension providers, to increase their role in funding start-ups and small and medium enterprises (SMEs).

Read IPE’s interview with the chief executive of Norges Bank Investment Management here.

Video: Harvard’s Josh Lerner on New Models of Private Equity Investment

Here’s an insightful discussion with Josh Lerner, professor of investment banking at Harvard Business School. Lerner discusses pension funds’ search for alternative ways to invest in private equity, cutting out the middleman, and more.

 

 

Cover photo by c_ambler via Flickr CC License

CPPIB Commits $330 Million to Canadian Private Equity

Canada

The Canada Pension Plan Investment Board (CPPIB) is putting an additional $330 million into a fund managed by NorthLeaf Capital Partners that invests in the Canadian private equity market.

The move is the latest in a series of commitments to Northleaf funds and Canadian private equity.

From a CPPIB press release:

This investment is in addition to CPPIB’s $70 million commitment in 2014 to the Northleaf Venture Catalyst Fund. Since 2005, CPPIB has committed $1.2 billion to Canadian private equity investments through its partnership with Northleaf.

The investment objective of this additional mandate is to focus on Canadian small and mid-market buyout and growth equity funds that are seeking to raise $1 billion or less in capital commitments.

CPPIB is one of the largest and most active investors in Canadian private equity and venture capital with approximately $4.1 billion in commitments to Canadian fund managers and an active direct private equity investment strategy for the Canadian market.

“By expanding our successful Canadian fund-of-funds program, CPPIB can effectively access the Canadian private equity market,” said Jim Fasano, Managing Director, Head of Funds, Secondaries & Co-Investments, CPPIB. “We remain confident in Northleaf’s capabilities, expertise and proven track record in continuing to manage this program.”

“We look forward to continuing our longstanding partnership with CPPIB in managing this additional mandate for the Canadian private equity market, and building a focused portfolio of top-tier Canadian mid-market funds,” said Jeff Pentland, Managing Director, Northleaf Capital Partners. “We are proud to have supported CPPIB in advancing their program since 2005, and we value and appreciate CPPIB’s continued confidence in our team, track record and investment process.”

The CPPIB managed $201.1 billion in assets as of March 31, 2014.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Recruiting Private Equity Talent Getting More Expensive For Pension Funds

flying moneyAs 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

Is It Harder Than Ever for Pension Funds to Invest With Top Private Equity Funds?

lock

Many more private equity funds reached or surpassed their hard caps in 2014 than in 2013, and the funds are also raising capital at a faster pace.

As a result, many pension funds are finding it difficult to put their money in the most sought-after private equity funds.

From the Wall Street Journal:

Heated competition to get into top private-equity funds is leaving some investors out in the cold.

Pension funds, endowments and wealthy individuals that invest with private equity are finding it increasingly hard to get into the most sought-after funds, according to data and industry participants.

Private-equity firms, which raise money from such investors and then put it to work in various investment strategies, are generally filling their coffers faster this year from clients. The proportion of private-equity funds that reached or exceeded the maximum amount the firms set out to raise this year is at its highest level since at least 2009, according to a snapshot of funds for which private-equity tracker Preqin has data. Typically, firms put a limit on the size of the fund they are raising, known as a hard cap, at the beginning of the fundraising process. That hard cap generally can’t be exceeded without approval from fund investors.

As of Nov. 13, 55% of roughly 280 funds for which Preqin had hard-cap data reached or surpassed that maximum size. Last year, 43% of funds hit or exceeded those limits.

Also, private-equity firms have taken an average of 16.4 months to raise capital for funds that have closed this year, Preqin data show. That’s two months shorter than the average time it took to raise funds that closed in 2013.

“The number of quick fund closings has been especially pronounced this year,” said Cathy Konicki, a partner at investment-consulting firm NEPC LLC.

Read the entire Wall Street Journal report here.

 

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San Francisco Pension Postpones Appointment of Board Member in Wake of Ethics Complaint

Golden Gate Bridge

San Francisco’s former first lady Wendy Paskin-Jordan sits on the board of the San Francisco Employees’ Retirement System (SFERS); her seat is appointed by city mayor Ed Lee, who was ready to appoint her to another term.

But an ethics complaint has put Paskin-Jordan’s appointment “on hold”. The details of the complaint:

The main issue discussed Tuesday was her investment in Grantham, Mayo, Van Otterloo and Co., an investment firm, in which the employees’ pension fund has invested $388 million. In a required financial disclosure statement filed last year, Paskin-Jordan reported she had invested between $100,000 and $1 million in GMO in August 2011. That amount, however, is below the company’s minimum investment threshold of $10 million.

City law prohibits board members from investing in private equity, limited partnerships and in nonpublically traded mutual funds doing business with the Employees’ Retirement System. Additionally, city law prohibits a board member from soliciting or accepting “a business opportunity, a personal loan, a favor or anything of value from any public entity or firm doing business with SFERS.”

Paskin-Jordan has been out of town recently, but the rest of the board wants to give her a chance to explain the situation for herself in front of the board. Meanwhile, she has the support of the retirement system’s Executive Director. From the SF Examiner:

In a Dec. 8 letter to the Ethics Commission, retirement system Executive Director Jay Huish argues that both these laws were not broken by Paskin-Jordan’s investment.

Huish noted that GMO is considered a manager of public-market assets, and that Paskin-Jordan had received a threshold waiver to invest in GMO from her former employees who went on to work there. That waiver, Huish said, was granted before she was appointed to the board and exercised after she was on the board.

The San Francisco Employees’ Retirement System manages about $20 billion in assets.

 

Photo by ilirjan rrumbullaku via Flickr CC License

Chart: Which Type of Private Equity Investors Are Most Resistant to Letting An Underperforming Fund Change It’s Terms?

limited partners, private equity

Consider this scenario: A limited partner invests money in a private equity fund under a certain set of terms and conditions. But eventually, it becomes clear the fund isn’t achieving the preferred performance and the general partner (PE firm) approaches the LP to re-set the terms of the deal.

A recent survey asked institutional investors whether they would comply with the GP’s request.

Turns out, pension funds would be more resistant to the changing of terms that any other type of institutional investor – over 60 percent said they would refuse to re-set terms.

 

Chart credit: Coller Capital

CalPERS Puts Private Equity Benchmarks Under Review

CalPERS

CalPERS’ private equity portfolio underperformed its benchmark by 3.3 percent last fiscal year – but that’s only one of the reasons that the country’s largest public pension fund is putting its private equity benchmarks under review.

Reported by Pensions & Investments:

CalPERS’ $31 billion private equity portfolio has underperformed its policy benchmark over both long- and short-term periods, shows a review of the program, but pension fund officials feel part of the problem is that the benchmark seeks too aggressive a return and are seeking revisions.

The private equity staff review, to be presented to the investment committee Dec. 15, shows that as of June 30 the private equity portfolio produced an annualized 10-year return of 13.3%, compared to its custom policy benchmark of 15.4% annualized.

Over the shorter one-year period, CalPERS’ portfolio returned 20%, compared to the benchmark’s 23.3%; over three years, it returned 12.8% annualized compared to the benchmark’s 14.5%; and over five years, it returned 18.7% compared to the benchmark’s 23.2%.

But the report says the benchmark — which is made up of the market returns of two-thirds of the FTSE U.S. Total Market index, one-third of the FTSE All World ex-U.S. Total Market index, plus 300 basis points — “creates unintended active risk for the program, as well as for the total fund.”

California Public Employees’ Retirement System investment officials have said publicly at investment committee meetings that they feel the private equity benchmark they are shooting to outperform is too aggressive.

CalPERS manages $295 billion in assets, of which $31 billion is private equity.

 

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