RPMI (Railpen) senior investment manager, private markets, Richard Moon confirms there had been a re-setting of fees in 2009 and 2010 but liquidity re-entered the market and funds have felt less pressure to adjust or negotiate on terms. “The transparency has improved but it is not enough. There still seems to be a one-sizefits- all strategy regardless of the size of the fund and I think there needs to be different structures to reflect the differences.
“We want to know with clarity what exactly we are paying for and whether it is the right amount of fees. If investors have this information, it will enable them to make better decisions on investing in the product.”
RMPI is not alone in its rallying call. Dutch funds are also requesting more detailed information with PGGM announcing it will not invest in external money managers, including private-equity firms, that don’t fully disclose their fees. Meanwhile, its peer, the €416bn APG, is developing a tool to measure fees as a percentage of added- value, enabling it to better compare different managers in all asset classes.
Behemoth funds across the Atlantic are following suit, but they have also taken part of the blame and admitted they didn’t know how much they were paying their private equity managers. The $190bn California State Teachers’ Retirement System ( CalSTRS) said it had failed to record total payments made to its managers over a period of 27 years, while the California Public Employees’ Retirement System (Calpers), the second-largest US public pension fund at $300bn, conceded it was unclear over payments of “carried interest” or investment profits over a period of 25 years.
Both are busy rectifying their reporting systems but Calpers is also overhauling its relationships across the board. It is whittling down the number of ties it has not just with private equity but also real estate and other external fund managers from 212 to about 100. Others are adopting a more proactive approach and are putting pressure on private equity firms to offer co-investments on a no fee, no carry basis. This is according to a new study entitled, The next generation private equity investor: implications for firms and managers, by Josh Lerner, professor of investment banking at Harvard Business School, Hugh MacArthur, head of the global private equity practice at consultancy Bain and Company, and Marcus Simpson, head of global private equity at QIC, a government-backed investment manager in Australia.
The study also revealed that firms believed they could generate higher returns by taking matters into their own hands. It cited a report published last year by private markets specialist StepStone which found that 63% of co-investments outperformed the fund from which the private equity firm was contributing its side of the investment.
The Canada Pension Plan Investment Board as well as Singaporean sovereign wealth fund GIC have been at the forefront and are increasingly seeking to buy assets directly, rather than just through private equity firms. PGGM has also been building its in-house team to invest in companies directly, besides private equity firms and other investors, after selling its private equity investment unit in 2011 while in the UK the RMPI spent the last year bolstering its internal resources to both co-invest together with other schemes or private equity specialists, as well as possibly purchase assets directly.
“We are developing models to enable us to have greater flexibility and control over our assets,” says Moon. “Also, because of our size, the cost is less to do this in-house. One of the most important questions is where do we want to take exposure? We then identify the pockets of opportunities and either co-invest alongside our existing GPs or look for new partners. For example, we think there are attractive returns in niche areas or the small to mid-sized sector because the markets are more inefficient than the larger buyouts.”
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