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Private Equity Rewards Pensions?
Ellen Kelleher of the FT reports, Private equity rewards pensions:
The private equity holdings
of the world’s largest public-sector pension funds outperformed most
other asset classes in the short and long term, new research suggests.
The
20 largest public pension funds now have an estimated $224bn allocated
to private equity deals – or 5.5 per cent of their capital on
average.
Their investment have provided strong returns, according to a study by Preqin, an independent research house that focuses on alternative assets.
The
study of the financial statements of more than 150 public pension
funds from North America, Europe and the UK suggests the returns on
their private equity investments and also their fixed income holdings
in many cases, outshone hedge funds, real estate and listed equities.
As
of the second quarter of 2010, private equity and fixed income were
the only investment types to generate positive median returns across
one, three, five and 10-year periods; the other asset classes fell into
the red for at least one of the periods, the study shows.
All
asset classes show positive returns across five and 10 years, but only
fixed income and private equity showed positive returns across the
three-year period, reporting respective gains of 7.6 per cent and 0.6
per cent.
“Private equity investments provide diversity within
the pension funds’ investment portfolios, and have the potential to
yield high returns,” said Tim Friedman, head of communications at
Preqin.
As overall mergers and acquisitions activity
starts to rebound this year, bankers expect it to throw up
opportunities for private equity groups to team up with big corporate
groups, either by financing bids or buying non-core subsidiaries.
A return in force to dealmaking in Europe last year by private equity firms came in spite of continued tight supply of finance.
The value of company buy-outs almost trebled in Europe from €18.3bn ($25bn) in 2009 to €49bn last year.
I take this research from Prequin
with a grain of salt. Sure, private equity did perform well over the
last 10 years but does this automatically imply that it will continue to
outperform over the next 10 years? I know public pension funds like
OMERS are aggressively moving into private markets,
and while it might make sense for them because they have the internal
expertise to do so, it certainly doesn't make sense for every pension
fund.
A few days ago, I wrote on Carlyle's acquisition of AlpInvest, a European private equity fund of funds owned by Dutch pension funds APG and PGGM. A senior pension fund manager shared these thoughts with me on this deal:
A scenario:
AlpInvest
will enable Carlyle to go public, and thereafter I bet will merge with
Blackstone or some such, creating a mega private equity/hedge fund
firm.
The
private equity asset class will roar ahead unabated based on the
publicity and related hopes and dreams of institutions, and all this
will come to a reckoning in 2013/14 or so (when the wall of debt
refinancing comes home to roost). Then the slow, grinding diminution of
an overdone industry will unfold for the decade thereafter. Handfulls
of firms and institutions will end up with positive IRR for the full
length of their programs.
Mercer has already promoted PE going forward as having expected returns less than public markets. They are not wrong.
I
also worry that PE returns will disappoint public and private pension
funds in the next decade. There is a tsunami of liquidity flowing into
private markets as every single consultant is touting the "benefits of
private equity" (and other private markets) without understanding the
nature of the asset class and how its performance is linked to that of
public markets. Moreover, studies have shown
that performance persistence of private equity is concentrated in the
top funds and that the "illiquidity premium" doesn't exist if you invest
in average funds.
The question that all investors should
think hard about is will private equity continue to outperform public
markets and other asset classes in the future? If so, in which countries
and in which sectors? Do they have internal expertise to do direct deals
and co-investments? If not, then why bother tying up capital in an
illiquid asset class which might very well underperform public markets?
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What a scam. Private equity valuations are fluid on the upside, but sticky on the downside. Everyone else's private equity valuations are down in the last 5 years(see Blackstone, KKR), but MY private equity valuations are up, because I'm the one that sets the valuation metrics. I also believe cops shouldn't investigate cops.
Is the "smarter investment manager" theory more or less retarded than the "bigger sucker" theory?
I believe PERS has stated a desire to up their PE allocation to something like 15%, which would be a huge increase in their percentage allocation and a huge increase in the actual dollars chasing, what are almost surely, diminishing returns in the PE space.
IOW, I agree with Leo.
twice
the big problem is not so much return ,, but huge underfunding to pay for profit, government boondoggles and closed eyes pin the tail on the hind end of a scam,
gold and silver have returned 17% year over year for 11 years ,, silver about the same .. 4,00 bucks to now 28.00
but a whole cadre of misinformed Keynesian's have misread the economic world wide problem .. and as such will steer away from gold or silver ..
and watch hopelessly as the pension problems bankrupt the government entities, the underfunded corporate models..
You mean they will have to show these pension liabilities on their books lol ]
what Will the pension guys say as gold goes to 2500 silver 60 in the next couple years ,, as the roof falls of private equity,, or they capture a nice 2% return over the benchmark S and P
they think 8% get 2% and roll in exoticzy .. while inflation roars ahead 9%
only fixed income and private equity showed positive returns across the three-year period, reporting respective gains of 7.6 per cent and 0.6 per cent.
That's because private equity is marked to fantasy until the investment position is closed. Try liquidating all of the positions at year end 2010 and see if you get year end 2007 prices.
+1