Resetting misaligned interests cuts costs, gives back control to LPs: Novarca’s Monk

  • Why this is important: Analysis through a lens of costs and fees can help LPs design portfolios that serve their interests
  • Who to contact: Novarca North America

Institutional investors’ appetite for private equity is high but the interests of GPs and LPs are often misaligned, especially in today’s frenetic fundraising market.

This misalignment can lead to suboptimal returns and puts institutional investors at a disadvantage, said Ashby Monk, executive director of Stanford University Global Projects Center and co-founder of Novarca North America, which helps institutional investors cut investment costs.

Monk was retained by Pennsylvania’s Public Pension Management and Asset Investment Review Commission to help review the state’s pension funds. The commission is tasked with identifying $1.5 billion in cost savings for each pension fund, a news release said.

The funds under review are the $59 billion Public School Employees’ Retirement System (PSERS) and the $29.1 billion Pennsylvania State Employees’ Retirement System (SERS).

An efficient way to reduce misalignment is to review the portfolio through the lens of costs and fees, Monk said.

Monk declined to comment on the Pennsylvania assignment, saying it was early days. He said that in general the high demand among LPs for certain funds in market can create an environment ripe for misalignment.

“Some GPs have a take-it-or-leave-it strategy, and often GPs pit one LP against the other,” Monk said.

This pressures institutional investors that are bound by their fiduciary duties and small team sizes, he said.

“Institutional investors end up investing in funds that are not aligned with their overall mandate,” he said. “They also pay higher fees to get access to preferred managers.”

As part of the review process Monk helps institutional investors review their sector/market focus, co-investments and other partnerships and how GPs fit their strategic goals.

For instance, at North Dakota State Investment Board Monk reviewed PE strategies; later he reviewed the world equity portfolio as well.

“[He] helped review our portfolio and checked pricing levels for the commitments we were making,” said David Hunter, chief investment officer of the North Dakota board.

In most cases, Monk’s review helped validate its PE strategy and helped cut costs, Hunter said.

Monk has previously advised University of California Board of Regents, North Dakota State Investment Board, AustralianSuper in Melbourne and OPTrust, which administers one of Canada’s largest pension plans.

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