- Why is this important: For LPs, concentrating investments in fewer managers has upside … and downside.
Many pension funds are trimming manager relationships to “core” groups and committing larger amounts to re-ups. But could they be harming themselves in the long term?
To be sure, fewer managers and larger commitments can lead to a stronger bargaining position to negotiate lower fees and get priority for co-investment opportunities, a chief investment officer told me.
In-house private equity teams at public pensions are small, sometimes with just two or three members. Despite using an adviser to manage the back end or help with due diligence, keeping up with scores of general partners can stretch the team, a chief investment officer told me.
“Fewer relationships make for better GP alignment,” the CIO said.
For LPs like Pennsylvania State Employees’ Retirement System, creating a core group can also be a way to restore faith in the pension fund’s commitment to private equity. PA SERS faced disenchantment among its GPs after it curtailed PE activity in 2012-2013.
In the past two years, David Felix, managing director of the alternatives portfolio for PA SERS, has been instrumental in rebuilding trust. Felix has traveled to meet with many GPs, explaining the pension system’s strategy and path forward. Read my story here.
But that said, what happens when dozens of public pensions all pick similar sets of core managers? It can lead to even the most capacious fund managers getting oversubscribed and tempted to raise more money than they should.
Indeed, the number of funds reaching hard caps in their fundraising should worry institutional investors, said a limited partner who asked not to be named. “LPs are hurting themselves by chasing the same funds and increasing the fund sizes,” the source said. “It reduces their negotiating power.”
“Some GPs have a take-it-or-leave-it strategy, and often GPs pit one LP against the other,” Monk said. Read my story here.
What are your thoughts on this conundrum? Email me at email@example.com.