Anyone for private equity?

Pension funds remain cautious when it comes to private equity, according to Kerrin Rosenberg of Hewitt Bacon & Woodrow, a global outsourcing and consulting firm. At the Alternative Investment Summit conference in London in March he said: “Private equity is just not on the agenda. No one is interested at the moment. I can’t get five minutes airtime to talk about private equity to any of our clients.”

One of the main reasons he cites is a lack of familiarity with the asset class, a lack of transparency with regards to performance figures and the issue of management fees.

Rosenberg says there are high returns for the asset class as a whole, but that a comparison with other assets is difficult, mainly due to the fact that coverage is patchy, records are not net of all fees and any sort of performance figures are only valid over a long period of time. But he adds: “There’s no reason to think that a buyout or buy-in [of a private company] is more risky than a similar company on a quoted market.”

The single most important message to clients he stresses is the decision of which private equity funds you choose to invest in, rather than whether you choose to invest in the asset class at all. Investors are recommended to diversify exposure to a range of funds. Whether they will be convinced to do so is another matter according to Kerrin as he expects more bad news for the industry to come. “We haven’t experienced the full extent of the influence of the Internet craze on performance figures yet.” Performance figures take a long time to come through and this is something trustees aren’t used to, he says. “You should be prepared to wait over five years for meaningful performance figures.”

Performance measurement is a grey area for investors as valuations are unreliable, you cannot calculate time-weighted returns and performance should really be based on cash back to investors.

The issue of management fees is another factor deterring institutional investors. There are usually two main components to the management fees – the annual charges and the performance-related bonus, commonly referred to as “carry”. The annual fee is charged on commitments and not money invested and is equivalent to around four per cent per annum. The performance bonus is usually a percentage of capital gains and is subject to a hurdle, typically 20 per cent.

Rosenberg says: “I think we’re in for some damaging news. Some technology funds will show awful returns, but haven’t brought down their fixed fees. The individuals who set up those funds will walk away very wealthy individuals – they won’t share the pain. I think this will be very damaging for the industry.”

Rosenberg recommends a three per cent to five per cent exposure to private equity for clients. Anyone who chooses to invest in private equity, should be prepared to do so for the long term. He warns: “Private equity is like marriage – you can get out of it, but it’s expensive and a pain in the neck.”