Overuse of credit adds to PE crunch for pension funds

Public plan sponsors, already facing an overheated market for private equity investments, have to contend with a new obstacle in evaluating private equity managers and putting their money to work: the increasing use of credit lines.

General partners (GPs) are increasingly turning to subscription credit lines, which use limited partners’ (LPs) capital commitments as collateral to secure a line of credit from a bank, to fund acquisitions and delay calling on partners’ commitments. The approach began as a short-term tactic that benefited LPs, by giving them more time to meet cash calls instead of forcing them to pony up on a “just in time” basis. But institutional investors say the tactic has been expanded to delay capital calls in a way that could
inflate a private equity fund’s internal rate of return (IRR), making it more difficult for investors to evaluate potential partners and potentially triggering carried interest fees that would not have been warranted if the GPs put their partners’ money to work in a more timely manner.

“It’s like a baseball player taking human growth hormone and steroids — it can make an average player look terrific in terms of home runs, batting average, and slugging percentage,” David Fann, president and CEO of TorreyCove, a private equity and real assets consultant, told MMR. “It can make a mediocre fund look terrific on an IRR basis.”

Pensions are already feeling crowded out of private equity, with soaring demand for funds managed by top general partners. Entry prices for assets remain high, and dry powder has reached record levels — $906bn according to Preqin’s latest quarterly report on private equity, making for a challenging environment for managers looking to put capital to work. Credit only makes their jobs tougher.

Read the full story: Overuse of credit adds to PE crunch for pension funds

Published by Money Management Report/Pageant Media.

Oregon aims to build world-class investment culture

When John Skjervem joined the Oregon Investment Council as CIO five years ago, he was surprised to find out that the nearly-$100bn system had long been operating with what he called “a skeleton crew.”

The system had been successful, but its small staff, antiquated equipment, and its division into two physically separate offices, all posed long-term risks, according to Skjervem. After making his concerns known, the Oregon state legislature responded this summer by passing a budget that adds 27 positions to the investment division over the next two years, for a new total of 66 positions.

“When I was hired, I was surprised to learn that we were managing a portfolio of such size and such complexity with such limited staff,” Skjervem told MMR.

The new hiring authority will help the investment division build a worldclass investment culture, Skjervem said, even in a relatively small market like Tigard, Oregon (population 52,000), where the investment division is housed. The new hires will create a stronger and more diverse investment staff, and build on previous improvements, like the consolidation of office space and the installation of new technology, Skjervem said.

“It’s like a do-over,” he said. “You get a brand-new office, you get essentially to double the staff, so you get to inject it with the types of people that you think are going to be most energizing and complement the existing staff in terms of diversity and inclusion. It’s really exciting to think about building a culture that’s unique to the Oregon investment division and a culture that people want to be a part of, that’s stimulating and inspiring so they want to come to work every day.”

Read the full story: Oregon aims to build world-class investment culture

Published by Money Management Report/Pageant Media.