Pension Limited Partners and Private Equity Fees

News about private equity scions has dominated the headlines during this almost home stretch of the 2012 U.S. presidential campaign but other reasons abound as to why we should pay attention to this $2.5 trillion market, not the least of which is a continued allocation to this asset class by plan sponsors.

According to "Top 200 pension funds still carrying torch for alternatives," Pensions & Investments writer Arleen Jacobius (February 6, 2012) describes a 16% increase to $313 billion for the year ending September 30 or about three times the commitment to hedge funds for the same time period. Seeking diversification and higher returns are common explanations for the attraction.

The flip side is that private equity funds want pension money. In "Private equity courts pension funds for M&A finance," Reuters' Simon Meads writes that "private equity firms in Europe are sounding out yield-hungry" institutional investors as an alternative to "hard-pressed banks."

Pensions, endowments and foundations are getting the message that they may be in the cat bird seat in terms of power and the ability to negotiate on their terms (assuming that they are not creating an in-house private equity bench or partnering with industry giants as co-investors to source deals). In "Private equity LPs draw favorable deals from GPs" (The Deal, July 12, 2012), Vyvyan Tenorio writes that the current supply-demand relationship is allowing institutional investors to enjoy a bigger slice of transaction fees charged to portfolio companies when they exit. Pensions may receive a break on management fees too, depending on the willingness of market leaders to budge for large check-writers, many of which are asking that a separately managed account be established.

Besides the tug of war between general partners and limited partners over fees, the institutional presence is being felt in discussions about compliance and best practices.

Foley & Lardner LLP attorneys Roger A. Lane and Courtney Worcester cite valuation methodologies and the use of debt to finance deals as two areas that keep "Private Equity In The Crosshairs" (Law360.com, July 11, 2012). Referencing several current lawsuits to illustrate each issue, they write that private equity funds are likely to face "certain specific legal hurdles and challenges" in the near future.

Law professor Steven Davidoff and New York Times contributor adds that limited and costly credit, slower fund-raising, a decline in returns and more expensive transactions are some of the reasons that small and medium players are heading for the hills. Even investing outside the United States could be a problem if local economies slow down and/or finding a partner is difficult and expensive. According to "For Private Equity, Fewer Deals in Leaner Times" (Deal Book, New York Times, May 29, 2012), Davidoff adds that industry consolidation will continue, activist deals may become more popular (when they offer more bang for the buck) and pursuing targets will require aggressive attention.

All in all, the prognosis for the private equity industry reflects structural changes in the global markets and the relationship between investors like pension plans and their general partners.

Source: http://feeds.lexblog.com/~r/PensionRiskMatters/~3/i8BbQnUDsQM/

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