It was a significant move, considering the coalition represents more than $600 billion and many of the biggest investors in private equity like those of Oregon, Missouri and Rhode Island. John Chiang, California’s treasurer, was also a signatory.
My concern is the message will ring hollow, considering most of these officials have had the power to truly put some hurt on private equity by simply withholding their capital from the firms.
Here is what many consider a truth in the industry: Limited partners will moan about bad terms or opaque LPAs, yet they will continue to commit money to the best performing funds in the industry, no matter what terms are being offered.
This is reality and it’s how this industry functions. LPs will flock to the best. This year is a prime example. There are a handful of firms out there considered top performers that have come back to market to be greeted by more demand than they can handle. Some, like Clearlake Capital Group, raise their hard caps to let in more LPs. Others turn them away at the door like New York City bouncers.
LPs herd into these funds to get a piece of that outperformance the manager has produced in the past. But also, and here is another perceived truth in this industry, no one ever gets fired for investing in the big name. This means the mid-level private equity pension official is probably not in danger of losing her job when she brings the new fund from a top performing firm to her boss, even if 10 years down the line that fund ends up a loser.
Here’s what needed: The political message was an excellent step on the parts of the states and cities that took part. But that message must filter down to the staff level, and staffers have to be empowered to say no, even to the strongest manager out there, if they can’t run their fund in a transparent and LP- friendly manner.
Some systems have moved in this direction.
Oregon’s state treasurer John Skjervem said at a Buyouts conference last year that the system would cut its private equity target allocation if unattractive terms and higher valuations made it too difficult for the system to achieve strong returns.
The system last year scrapped two approved commitments after failure to reach agreement during later negotiations, Buyouts previously reported.
“You have to draw a line in the sand, stand up for what you believe in, and walk away,” Skjerven said at the PartnersConnect West conference last October.
It remains to be seen if other signatories of this letter will stand up for what they have signed their names to, and have the courage to walk away from top performers who aren’t looking out for investors’ best interests.