Private Equity's Unwelcome Intruder?

Please read my latest entry and post your comments here:

http://pensionpulse.blogspot.com/2010/03/private-equitys-unwelcome-intruder.html

Thank you,

Leo Kolivakis

Comments

[hooligan2009]

and another thing, there is an election in the UK in 40 days. The current corrupt Government (expenses fraud, no process for the Iraq war, selling representation within the Cabinet at £5,000 a pop, peddling jobs to friends in nationalised banks, doubling debt to GDP with no mandate etc etc) is about to make way to an incompetent Government (no brains, no experience and no new ideas). What makes Ontario think that the new Government will simply allow full competition to a National Lottery? Sure as hell isnt a National Lottery now, its a a Lottery run by a pension fund. Legal precednt would dictate that all pension funds can start lotteries. The menu costs are cheap too, just paint numbers on ping pong balls, shove them in a washing machine and get someone asshole from Ernst and Young to stand there and say, yes those numbers came out and I stood there. What a joke.

[hooligan2009]

Let's see. If this is a good deal, then finance from any of the UK Government owned banks would be readily forthcoming and ANYONE, not just Private Equity or a risk tolerant pension fund would find this asset cheap. This is a lose/lose deal. If it were cheap, then why wasn't I asked to put together a package/syndicate for an extra few million to £400m,a state owned monpoly to pay out only a certain percentage of bets? Bleh, the house in this case always wins by 20%. On the flip side, if it was expensive then why should those in a pension plan buy it? Ugh. I am sure that any blogger on this site is as entitled to bid, but can't because the bid process was rigged so that Ontario pensioners overpaid. There has been no price discovery and this is the rigged communist styled market that we now live in. Long live regulated labor markets, interest rates and risk setting! I am reminded of that movie about a guy with an iq being transported a few hundred years in time where the equivalent iq is just ten (though still a 100 in 200 years time of course).

[Leo Kolivakis]

Here are some comments I received:

"The partners of Private equity firms usually are serial entrepreneurs who have their own substantial amounts of money in the fund  AKA skin in the game and hard knocks experience. The EMPLOYEES at a pension fund have neither.  I am not a big fan of private equity as the valuations are suspect. But if I had to chose one to manage my money I know which one I would pick because in private equity realm fees are usually a rounding error. They either win huge or go bust."

and this one:

"I think it is still way too early to pass judgment on these deal as only time will tell if pension fund are discipline enough to play this role- I hope they are but it is a tall order

I just hope it sends a signal to the GPs that possibly pension funds are dead serious about reviewing the economic arrangements of these business model with the 2 and 20 plus fee. Something is sure I believe that the Canadian pension funds are going to antagonize the community of GPs and may be this is a good thing

The board of these pension funds need to be ready to pay their deal makers just like the other side of the table and let these deal makers have real skin in the game and have downside risk as well as the compensation structure today is insane."

[GoldmanSux]

Don't know the particulars of this deal, but purchasing a lotto monopoly sounds like a good thesis. I am somewhat shocked at the degree pensions are moving into illiquid investments though. And agree with the empire building comments. Within a month of the attempted BCE takeover by the Canadian pension fund, it was apparent that it would be an expensive levered disaster. They then spent the next year trying to jam it together and justify their stupid original purchase decision. It was such a big purchase...completely outsized. Enjoy your work Leo.

[wpw]

Leo can you please enlighten me what oversight there is of Teachers, CPP and other funds regarding these types of deals.  I don't necessarily have a problem with them doing this, if they have the capability.   But there are considerable risks.

Teachers in particular have been very aggressive and I sometimes wonder about the greater risk of empire building by management.   After all, the objective of the fund is simply to provide retirement income for retired Ontario teachers, not to build a sprawling global empire for management.

[Leo Kolivakis]

They are all into building their empires. Oversight is a joke at all the large public pension funds. I will expose this when I speak at the Senate Standing Committee in late April. Basically, we need more independent - truly independent and competent board of directors (not industry hacks). We also need to beef up governance, implementing worldwide best industry standards, which includes independent comprehensive investment and operational audits on all investment activities. This includes fraud audits, and these reports need to be publicly available.

[Captain Willard]

I think you are going to see more of this. Plan sponsors like Ontario Teachers' cannot afford to pay the 20% promote to private equity and still make their return goals. In the case of "simpler" businesses, like the Lottery, it makes sense to go direct.

But not all LBOs are simple. Managing these deals is not so easy, especially in a recession. You worry they will over-reach and screw up, leaving the taxpayer holding the bag.

[exportbank]

Governments (everywhere) are addicted to gambling, alcohol and cigarettes. They all turn to them for additional taxation whenever they need money. I'll guess the owners saw two things on the wall (so they sold) the taxing away of all profits - and/or a new second national type of lottery that would be government owned.

However - because these types of bets are long term they can be milked for bonuses for years and years before the eventual truth of failure appears. Will Teachers be paying their Ontario retirees in UK Pounds? If not you've got a huge currency bet on the table as well.

Leo.. keep the spotlight on Pensions - this and health care are killers.

[Mr Lennon Hendrix]

Pension funds should open casinos.