A panel of experts offered feedback on California Public Employees’ Retirement System’s plan to create a long-duration captive private equity fund, saying long-term or permanent investments could add value but would have lower returns than traditional PE.
The $346 billion pension has proposed a new investment model that would create two CalPERS -controlled PE funds, Horizon and Innovation. If approved, the Horizon fund would invest long term in large “core economy” companies, while Innovation would focus on late-stage investments in life sciences, healthcare, and tech.
Experts invited to speak at CalPERS’ January offside board meeting gave mixed feedback on the Horizon proposal.
“One of the things that gets a little lost in this discussion of long-term investing is there aren’t that many companies that you know when you buy them that you’d like to hold them for 20 years,” said TPG’s Jonathan Coslet.
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Long-dated private equity funds appeal to investors who dislike the constant churn of typical PE funds, but Commonfund isn’t convinced that evergreen funds’ returns will measure up over the long haul.
Large public pensions say long-dated PE funds can match their long-term liabilities better than traditional funds with 10-to-12 year terms. New York’s retirement plan recently committed $500 million to Vista’s perennial fund, and CalPERS is going a step further, planning its own perpetual investment vehicle for long-term ownership of “core economy” companies.
Commonfund, which manages $24.1 billion in endowment and foundation assets, says those types of funds offer more convenience than returns.
“I’m not a huge fan of long-dated funds,” Commonfund Capital President and CEO Peter Burns said. “[Very few companies] can sustain an edge in whatever they do for 20 years. They may have a great company with great products and great margins, but 15 years later the game may have changed completely, with new technology and new competitors.”
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Private equity is one of the most popular investment strategies with large public systems in the U.S., based on how many institutions are boosting their target allocations to the asset class. But several large systems will be looking to do more than passively invest: many want a piece of direct deal action.
Co-investments are seen as an attractive way to reduce fees and allocate more capital, but access to direct deal flow is not always easy to get. LPs that take a more active role can be more effective partners for GPs, but they will need resources and governance structures that allow them to act decisively to approve and pay for deals, according to Brian Gildea, head of investments at Hamilton Lane.
“Big LPs really want to have more of a voice in terms of something that is more customized to their needs, rather than placing their assets in a blind-pool fund,” Gildea said.
Check out the full article, published by PE Hub, here: https://bit.ly/2IlTyRf