CalPERS to Cut Investment Fees by 8 Percent Next Year

Calpers

CalPERS calculates that it will cut investment-related fees by 8 percent in fiscal year 2015-16, according to a report by Bloomberg.

The pension fund has been looking to cut costs recently by reducing the number of private equity managers it invests with and moving more investment management in-house.

According to CalPERS’ proposed budget, obtained by Bloomberg, the 8 percent decrease in fees will come from several areas:

Calpers projects it will pay about $100 million less in fees for hedge-fund investments. The pension has said it would take about a year to unwind all its holdings. It paid $135 million in fees in the fiscal year that ended June 30 for hedge-fund investments, which earned 7.1 percent and added 0.4 percent to its total return, according to Calpers figures.

Brad Pacheco, spokesman for the pension fund, wasn’t immediately available for comment.

Base fees for private-equity investments are projected to decline 7.5 percent to $440.6 million as some investments matured, the number of managers was reduced and Calpers won better terms for new deals.

Base fees for company stock managers are projected to increase 25 percent to $51.3 million. Fees for performance are projected to decrease by $32.6 million because of favorable renegotiated contract terms, Calpers said.

[…]

The largest U.S. state pension fund, known as Calpers, projects that it will pay $930.7 million in base and performance fees to investment firms in the fiscal year that begins July 1, down from more than $1 billion this year and $1.3 billion last year, according to the fund’s proposed budget.

CalPERS managed $295.8 billion in assets as of December 31, 2014.

 

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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

Private Equity Eyes Longer Timelines For Largest Investors

binoculars

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.

 

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

wind farm

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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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.

Pensions Criticize KKR Over Fee Refund Spurred by SEC Exam

SEC-Building

Some pension funds are criticizing KKR’s communication with investors regarding “erroneously” charged fees; the firm refunded those fees last year, but waited a year tell investors that the refund was the result of an SEC exam.

From the Wall Street Journal:

KKR & Co. is getting unusually pointed criticism from some of its public-pension fund investors, after they discovered that KKR didn’t tell them for almost a year that its decision to refund some money was prompted by a regulatory exam.

The contretemps, rare in the tightly-controlled world of private equity, stems from a Securities and Exchange Commission exam of the industry giant in late 2013. Regulators found that the firm had erroneously charged some expenses and didn’t fully disclose it was collecting certain fees, according to a document obtained from one of KKR’s largest investors, the Washington State Investment Board.

As a result of the SEC findings, the private-equity giant in early 2014 refunded money to investors in some of its buyout funds.

As a result of the SEC findings, the private-equity giant in early 2014 refunded money to investors in some of its buyout funds.

Several KKR investors said they were informed of a fee credit but didn’t learn the reason until after The Wall Street Journal last month broke the news about the SEC exam findings and the refunds.

Read the full Journal article here.

 

Photo by Securities and Exchange Commission via Flickr CC License

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

Geithner Tells NJ Pension Panel He’s Bullish on Economy

New Jersey seal

Former U.S. Treasury secretary Timothy Geithner made an appearance at Thursday’s meeting of New Jersey’s State Investment Council, the entity that oversees the state’s pension investments.

Geithner was at the meeting because he is president of a private equity firm, Warburg Pincus, that handles a portion of the state’s pension money.

During his appearance, he talked about his optimism on the state of the U.S. economy. Reported by NJ.com:

Timothy Geithner, the former U.S. Treasury secretary and an architect of the Wall Street bailout, today told New Jersey’s pension investment council that despite the challenges of a “complicated, messy world,” he’s optimistic about the nation’s economy.

“The economy today looks much more resilient than it’s been in some time,” Geithner said, noting the expansion after the Great Recession has been moderate, steady and matched with restructuring of important financial underpinnings.

[…]

Taking questions from the council, he counseled them on global dynamics, including Russia, China and the emerging markets.

The U.S. is well-positioned to benefit from growth in those markets, that while “volatile and uncertain,” will grow faster in the long-term, he said.

“I think there is a reasonable basis for believing that we’re still at the early state of what’s likely to be a long period where average growth in these emerging economies is still two or three times the growth of major economies,” he said.

The meeting was also notable because it saw the release of an audit into a potential pay-to-play rule violation by Charlie Baker. The audit cleared Baker of any wrongdoing.

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.

 

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