Pension funds have been confounded over timing private equity investments for a lack of control on exits, rigid investment strategy, and limited gains when choosing the right time to allocate to the asset class.
Timing effects are limited because investors control capital commitment decisions but do not control when money comes back, Tim Jenkinson, professor of finance at the Private Equity Institute for Said Business School, University of Oxford, said speaking at the SuperReturn conference in Berlin last week.
General partners (GPs) are in control of decisions to exit private equity investments, he added.
During his conference presentation, Jenkinson showed the results of a study saying that counter-cyclical strategies investing in private equity lead to only marginal gains compared to investing a fixed amount per year in the asset class – so-called ‘steady as she goes’ strategies.
According to the study, ‘steady as she goes’ policies are simple, have been profitable, and delegate timing to GPs.
Perhaps, Jenkinson added, a corollary of the ‘steady as she goes’ policies for pension funds could be a more variable allocation policy, investing counter-cyclically, when fundraising is low, like now.
Pension funds and limited partners (LPs) worry at the moment of returning capital on investments, trying to learn from past events.
Morgan Stanley is seeing a certain inclination towards an equal distribution from the GP side, as it is hard to predict the performance of vintages, with allocations swinging in terms of sectors, said Liliya Kamalova, senior principal at Morgan Stanley Private Equity Solutions, during a panel discussion regarding the results of the study.
“GPs realise that LPs track [investments] as part of their due diligence, so they want to show a little more even and consistent investment pace,” she said, replying to a question on private equity firm KKR acknowledging that is difficult to time the market.
Kamalova spent six years at CalPERS Private Equity, the asset class’s management arm of the California Public Employees’ Retirement System, prior to joining Morgan Stanley.
CalPERS committed $27bn to private equity funds across 2007-2008 vintages, when “vintages were pretty much the worse that we have ever seen”, and $2.2bn in 2009-2010 vintages, a timing strategy that was not particularly successful, Jenkinson noted.
“This is what you might call inept timing, according to my definition, because you are doing the opposite of investing in the best vintages,” he explained.
A lot of US-based public pension plans fell into the same trap as CalPERS, Kamalova recalled, with GPs that started calling capital and pension funds ended up selling their most liquid assets, fixed income securities, at rock bottom prices, to come up with liquidity.
She added that one way to circumvent capital calls timing is through co-investments, secondaries, or looking at funds coming later in the fundraising process.
