“We’re at a new stage where pension funds and sovereign wealth funds are saying, wait a second, if we bundle our resources, we can get diversification by sharing the opportunities. Just like any other industry, models have to change. We don’t make cars like we did 20 years ago, or computers like we did 20 years ago, so why should we do finance the way we did it 20 years ago?”
Who said it: Leo De Bever, chief executive of Alberta Investment Management in the Financial Times
In Context: In this feature article, the FT describes direct investment by LPs, in particular Canada’s pension funds, which have been moving “aggressively” into dealmaking and other businesses that they used to outsource to private equity firms and hedge funds. The reporter says that disintermediation, a trend that has already hit several other segments in the financial sector, is now starting to happen in PE. The evidence presented includes an account of how the larger pension funds and sovereign wealth funds have staffed up internal investment teams to find PE deals on their own. It is suggested that the trend poses a threat to the PE status quo although the volume of deals in question is small. Private equity-backed transactions involving sovereign wealth funds, for example, have reached USD 11.5bn this year, or 6 per cent of total volume, and the bulk is passive co-investments alongside fund managers.
Yet it is ten times the amount five years ago, according to Thomson Reuters. The risks of direct investments for pension and sovereign wealth funds are clearly outlined: pension plans would be “hard pressed” to recreate the performance of established private equity groups such as Blackstone or KKR, according to sources quoted in the article, and are “not equipped to find and analyze deals”, therefore they are prone to “overpaying for assets”. The skeptics say it is not in the culture of pension funds to take control of companies and make tough business decisions. “Few public pension funds would be willing to face the political repercussions of cutting jobs at a company they have acquired or deal with bankruptcy,” says the FT. This topic is starting to get more attention in the press and we will continue to highlight it, as we have here and here. (Image Source: AIMCO)
Where we found it: ft.com