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US Pension Funds Adopting Canadian Approach?
Peter Lattman of the NYT reports in the Globe & Mail, U.S. state takes page from CPP, Teachers (HT: Keith):
For
decades, public pension funds have bankrolled the private equity
industry, investing billions of dollars with large firms like Apollo
Global Management and the Blackstone Group.
Now,
frustrated by what it sees as expensive fees and lack of transparency
at private equity firms, one state has decided on a do-it-yourself
approach.
South Carolina’s pension fund is creating an independent
firm to oversee the fund’s private equity holdings - doing what it
would have paid a private equity firm to do. The effort is similar to
the direct investment funds created by two of Canada’s biggest pension
plans - the Ontario Teachers’ Pension Plan and the Canada Pension Plan
Investment Board - but is believed to be the first of its kind in the
United States.
“It’s high time that state pension funds are able
to develop structures that have greater transparency and lower costs,”
said Robert L. Borden, the chief investment officer of the South
Carolina Retirement System Investment Commission, which oversees the
management of the state’s $25-billion pension (U.S.) fund. Mr. Borden
will run the firm under a plan approved last week.
Mr. Borden is
particularly critical of funds of funds, which are firms that manage a
portfolio of private equity funds. “There are layers of fees, your
control rights are zero, and your costs are astronomical,” he said.
“We’re trying to tackle that model.”
Although
South Carolina has a relatively small $5-billion private equity
portfolio, the initiative has raised eyebrows in the industry. State
public pension funds account for about 35 per cent of private equity
assets, according to data provider Preqin.
“This reflects how
desperate state pension funds are,” said Colin C. Blaydon, director of
the Center for Private Equity and Entrepreneurship at the Tuck School
of Business at Dartmouth College in Hanover, N.H. “They’re looking to
get big returns and put large chunks of money to work in private
equity, but don’t want to pay the expensive fees.”
By
reducing its reliance on outside money managers and investing directly
in companies and real estate, the pension fund could eliminate about
$2-billion in fees and other costs over the next decade, according to a
study by consulting firm Booz & Co. The firm would charge the
pension fund less than the lucrative fees - typically a 2 per cent
management fee and 20 per cent of a fund’s profits - commanded by
outside private equity firms.
Other state pension funds are
starting to take more control over their private equity portfolios as
they try to find ways to increase investment returns and cut costs.
Earlier this year, the California Public Employees’ Retirement System
announced plans to create portfolios with outside managers that would
charge lower fees and offer more customized strategies. The Teacher
Retirement System of Texas has expanded its program of co-investing in
deals alongside outside private equity firms.
But creating an independent firm 100 per cent owned by a state pension fund is novel.
“By creating it, we can build value for ourselves rather than buy into someone else’s firm,” said the 47-year-old Mr. Borden.
South
Carolina is also increasing its allocation to private equity, which
has historically generated higher returns than such traditional
investments as stocks and bonds. After a decade of sluggish performance
that made it difficult to achieve the fund’s target investment
returns, the state hopes that raising its private equity exposure will
help it to meet those goals. Over time, the fund is looking to commit
as much as $8.7-billion to the strategy, according to fund documents.
South
Carolina’s roughly $5-billion allocated to private equity has
investments in some of the most prominent buyout shops, including
Apollo, Apax Partners and Clayton, Dubilier & Rice, according to the
fund documents.
The enterprise still
plans to collaborate with these outside private equity funds. It
expects to allocate as much as 40 per cent of its assets to strategic
partnerships and so-called co-investment opportunities in which the
firm would piggyback on other funds’ deals. For instance, South
Carolina already has a venture with Apollo, called Palmetto, in which
it invests in European assets.
The South Carolina pension fund has approved $15-million in startup costs for the firm, which is set to begin next month.
Hiring
personnel will be a major challenge for the firm, which will have its
headquarters in Charleston and an office in New York. Initial plans
call for hiring 30 professionals by next year and ultimately more than
60 people, according to the fund’s documents. Although its reduced fees
will save South Carolina money, the firm’s lower revenue will make it
hard to pay compensation on par with Wall Street.
Another
potential issue: Private equity professionals may see the firm’s link
to the state pension fund - along with its unproven track record - as
less appealing or prestigious than working for an established firm.
Mr.
Borden pointed to a number of factors in its favour. The dislocation
on Wall Street has resulted in a greater supply of financiers looking
for new opportunities. And the firm would not have to court investors
in a difficult fundraising climate.“Capital is scarce and talent is readily available,” Mr. Borden said. “We couldn’t have done this in 2007.”
There
is no way Mr. Borden would have done this in 2007, and staffing such a
venture will be difficult but not impossible. Capital is scarce and
talent is readily available, but the question is for how long? Paul
Hodkinson of Financial News reports, KKR dealmaker predicts mega-buyout return:
One
of the top dealmakers at Kohlberg Kravis Roberts, the US private
equity giant behind the biggest buyouts in Europe and the world, has
said the mega-deals that characterised the industry’s boom years could
return within as early as six months.
Michael
Michelson, co-head of North America at KKR, was speaking on a panel at
the Dow Jones Private Equity Analyst conference in New York yesterday
and said improvements in the debt markets meant that it will soon be
possible to do deals worth $10bn.
Michelson’s
firm sealed both the $44bn buyout of US energy company TXU and the
£11.2bn buyout of pharmaceuticals group Alliance Boots in 2007, the
height of the debt-fuelled buyout boom, which remain the largest
buyouts globally and in Europe respectively.
He
said: “It is possible to raise $5bn to $7.5bn of debt for the right
deal. Debt markets have rallied to a higher point than I would have
predicted. It is possible we will see such deals being done over the
next six months.”
However,
Michelson added that while some large deals would “potentially makes
sense”, the majority of deals would remain below the $10bn mark and
others would require “a substantial equity component”.
The
comments followed a report by Thomson Reuters last week on Blackstone
Group executive Garrett Moran, who told attendees at the group’s
investor day that a $10bn buyout would be possible in the current
markets.
There has
been no deal bigger than $10bn in the global private equity industry
since 2007. Earlier this year a consortium including Blackstone Group
attempted to buy US payment processing company Fidelity National
Information Services for $15bn, although the bid fell through as fears
over a sovereign debt crisis in the eurozone spread through the markets.
Kevin
Conway, a managing partner at Clayton Dubliler & Rice also
speaking at the Dow Jones conference, said an important issue in the
return to large deals would be revolver facilities, and said “the sweet
spot” were buyouts between $500m and $5bn.
The
comments come amid a cautiously optimistic mood at the conference. In a
straw poll, 77% of delegates said the economy was improving, compared
to 23% who felt it was either in recession or headed back to recession.
Shawn Hessing, national sector leader of private equity at KPMG, said: “Private equity is just sleeping and it is waking up.”
Conway added: “I am fundamentally optimistic about the role private equity can play creating change.”
We'll
see if private equity starts waking up in the next six months. If
markets continue to grind higher, I think it's only a matter of time. As
for US state pension funds adopting Canadian direct investing approach,
they first have to attract and retain competent staff. And while that
looks feasible right now, it might be next to impossible if private
equity deals pick up significantly in the months ahead.
»
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Staffing should not be a problem. Wall Street looks to be giving out a bunch of pink slips in the near future - according to Meridith Whitney. Upwards of 80,000 will get their marching papers within the next year. We are already seeing this occur.
Keep pounding the table on this: If you absolutely *must* be dumbass long, index every dime of it, fire everyone involved and let the computers run it for 5bp per year.
Private equity is a key component of the ponzification of financial markets. It is also the place for over the hill investment bankers to go before they get de-equitized. The nerve of these people to try to upset the delicate Chi balance of Wall Street.
More power to the States, the more de-centralised the system the better
Putting private equity investment directly into the hands of a state-run enterprise opens up the possibility of corruption. Where private equity funds are motivated directly by returns (?) there is less likelihood of channeling funds on nepotistic lines. When there is a monopolistic state-owned company responsible for these investments, there is much greater likelihood of this happening.
Prove it.
Your statement is baseless while the Federal [self-p]reserve bank of treason bankrolls corruption from top to bottom of the current financial system.
I'm always a fan when bad behavior is marginalized by worse behavior to make it "okay."
While I don't disagree with you about there being a possibility of corruption, at least it would be at a more local level where the individual citizens have more say and better access to their (state government) representatives.
Also, I believe this is how the next civil war is already beginning, and just like the last one it is the states taking interest in themselves over the federal oligarchy. And people are going to start noticing how much better this philosophy (state control rather than federal) works for the local citizens instead of benefitting only the ruling elite and TBTF.
I wonder how long it will be before the White House will protest this move by South Carolina. I know it sure didn't take long for the federal level to step in and take the other side of the issue regarding Arizona's immigration law. And if you think the federal government intervened on a "moral" basis, you're an idiot. That's the cover story which distracts the masses from noticing the .gov forcing central planning upon the states which may not like it.
IMO - much better to put it in the hands of people who "could" be corrupt or corruptable, but are accountable and prosecutable, such as an independent state fund, than to give the money to legalized theft machines on Wall Street that are corrupt black holes and not prosecutable because they are above the law.
I completely disagree with your assumption. Nepotism and favoratism is the way Wall Street works. Those links have not yet been established with new state owned funds. It is MUCH more likely to happen on Wall Street because it is already happening on Wall Street.
the problem will be with the populist outrage at paying "state employees" of this state-owned fund compensation viewed as outlandishly high compared with the norm. even if they only paid senior partners $1mm and vice presidents $300k (well below market), the populists would go nuts.