Institutional appetite drives a rise in PE ‘mega-funds’

As institutional investors try to ramp up or maintain their commitments to private equity without spreading themselves thin on due diligence efforts, their increasingly concentrated investments have helped support a trend toward private equity mega-funds.

Concentration at the top poses some challenges, but investors aren’t fazed: Since 2015, fewer investors have sought to make four or more fund commitments annually and more are gravitating towards making two to three fund commitments, perhaps suggesting an increase in ticket sizes, research firm Preqin found. The increased demand, as well as a need to reinvest capital from older private equity investments, and new players like sovereign wealth funds and wealthy individuals, have pushed dry powder held by private equity fund managers to a record high of $1.09tn as of
March 2018.

Private equity managers with good track records are in high demand, and those managers are increasingly able to find enough capital to scale their efforts to previously-unheard of levels, according Christopher Elvin, head of private equity products at Preqin.

“There looks to be a trend towards mega-funds,” Elvin told MMR. “The private equity industry is seeing huge inflows, but investors are increasingly choosing to sink their capital in the largest funds. LPs (Limited partners) prefer to be involved with fund managers that have been successful in the past – with the expectation that those fund managers will be able to generate large returns in the future – and generally fund
managers don’t tend to raise large funds without building up a track record.”

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Published by Money Management Report/Pageant Media.

New York Common files its first cyber risk shareholder proposal

The $209bn New York State Common Retirement Fund filed its first shareholder proposal dealing with cybersecurity, calling on Express Scripts to publicly detail its cyber risk and security efforts.

While the proposal failed to gain the support of a majority of shareholders, the state pension system said that cyber risks will be an increasing concern for shareholders in the future.

“A significant number of shareholders spoke loudly at Express Scripts’ annual meeting supporting our call for the company to publicly detail its cyber risk and actions taken to ensure cyber security,” DiNapoli said in a statement. “Cyber security is one of the most critical issues facing businesses today and breaches can affect millions of people, but Express Scripts has provided shareholders with little reassurance or information on
what actions it has taken to mitigate cyber risk in its operations. Company executives should reassure investors that they have taken solid steps to mitigate the risk of a computer breach.”

The New York fund, which holds a $130m stake in the pharmacy benefits management company, requested that the Express Scripts board annually review and publicly report on its cyber risk, including risks related to outsourced business functions, a description of material cyber incidents, risks related to undetected cyber intrusions, and a description of relevant insurance coverage. The company disclosed in 2008 that a data breach affected the personal and medical information of more than 700,000 customers, and State Comptroller Thomas DiNapoli filed the shareholder proposal shortly after the Equifax data breach exposed the personal information of as many as 145 million Americans.

This is the first time the fund filed a shareholder proposal exclusively dealing with cyber security, spokesman Mark Johnson said. Express Scripts had sought to prevent DiNapoli’s proposal from going to a shareholders’ vote, but the Securities and Exchange Commission rejected the company’s request in March, according to the Comptroller’s Office.

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Oregon CIO uncomfortable with adding more investment risk

Oregon’s investment chief would not recommend adding any more investment risk to the state’s $100bn portfolio, saying in a recent meeting that investment income alone will have a tough time bridging the state pension’s $22bn unfunded liability.

The Oregon Investment Council, whose pool of assets includes the $76bn Oregon Public Employees’ Retirement Fund, had a special meeting in late April to discuss board governance, policy, and its appetite for investment risk. CIO John Skjervem said at the meeting that he appreciated the desire to maximize risk-adjusted investment returns, but said that investment staff couldn’t simply kick their strategies into higher

“We don’t have another gear to go to,” Skjervem said. “This is as aggressive a portfolio as I feel comfortable managing, and I believe to a person my staff feels the same way.”

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LACERS remains indecisive on private equity

The Los Angeles City Employees’ Retirement System (LACERS) remains indecisive about how best to proceed with its 14% allocation to private equity, with one member of the investment committee suggesting looking for a wider pool of consultants before proceeding with interviews of the three finalists identified after a recent search.

The $17bn fund’s private equity program has been unsettled since July of 2017, when the board blew up an ongoing RFP process and started from scratch. At that time, a board member accused the incumbent consultant – and investment staff’s preferred option for a new contract – of fudging the performance numbers for private equity programs managed on behalf of other pension funds. Other pension fund clients stepped to the consultant’s defense, and the consultant explained its methodology in a later meeting, but the bad blood caused by the incident caused the consultant, Portfolio Advisors, to withdraw from consideration during a rebooted RFP process. Now, LACERS is once again on the verge of making a selection during the rebooted consultant search, and once again, some board members seem dissatisfied with the process.

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Published by Money Management Report/Pageant Media.