With the California Public Employees’ Retirement System (Calpers) seeking to axe around two-thirds of its private equity (PE) managers, the average pension fund trustee could be forgiven for thinking the asset class no longer has a place in the average pension fund. After all, if one of the world’s biggest schemes is finding it hard to make it work, who can?
Private equity is one of those asset classes everyone likes the sound of, but are a bit scared of. They only tend to remember the horror stories that have done the rounds. It’s certainly true the number of schemes investing in PE has reduced in recent years, according to annual data from the National Association of Pension Funds (NAPF). This shows the average invested in the asset class has gone down from 3.6% in 2012 to 3.4% and 3.2% in 2013 and 2014 respectively.
However, the average amount each scheme has invested in PE would appear to be on the increase, falling from 5.8% to 5.3% between 2012 and 2013, but going up to 7% in 2014. So, what’s going on?
THE APPROACH
“Schemes are generally underweight, as they are close to the point of running off of distribution,” says Guy Hopgood, investment consultant and head of alternatives research at JLT Employee Benefits. As the investments approach the end of their lifespan, assets are being distributed to the investors. And so allocations are falling, naturally, and if this is to be reversed, schemes will need to recommit with current managers, find new ones, or pull out of PE altogether, though the latter option may not be possible for some.
“For trustees, the level of investment is important to consider. Though PE programmes may be in place, they will have large gaps and vintage exposure,” says Hopgood. “Schemes may wish to continue investing now rather than locking in the gaps in vintage exposure or backfill, perhaps with secondaries.”
Another influence over allocations is the relative performance of public equity markets, says Sven Lidén, CEO of Adveq. As equity markets fall, the relative value of the private equity holding will increase.
“You may have to wait until allocations of the other markets improve to be able to reduce the private equity holding in the portfolio,” says Lidén. “Public markets really play with private equity allocations.”
STICKING POINT
The least popular element of investing in PE is, perhaps unsurprisingly, the cost. Fees have traditionally been high – in the realm of two-and-20 – and things don’t seem to have changed very much. Sanjay Mistry, director of private debt at Mercer, says while there has been little change overall, the balance of power has certainly shifted towards investors.
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