West Sussex Pension Fund has decided to reduce over time its private equity allocation, concluding its performance does not justify its liquidity risk and the “luck” involved in manager selection.
While new funds are rushing into the asset class, schemes with long-running private equity programmes, such as the London Pensions Fund Authority, have recently begun reviews of whether the investment has provided the expected benefit.
West Sussex: investment breakdown
Equities: 65%
Bonds: 20%
Property: 10%
Private equity: 5%
Source: 2011/12 draft annual report
The £2bn West Sussex scheme, which has invested in the asset class since 2001, currently has a target allocation of 5 per cent.
But the fund has decided it will not be making further commitments to keep its allocation at this level, which will see private equity reduce as a proportion of the fund over time. The money could instead be diverted into low-volatility strategies such as smart beta, the scheme has said.
“Just looking at it as an asset class, we don’t think private equity on the whole, on average, gives you [sufficient] premium for the liquidity risk,” said Richard Hornby, director of finance and assurance at West Sussex County Council.
The fund is happy with both of its current managers, Hornby stressed, but has decided it will not be putting more money into private equity in the hope it gets the top-quartile performance necessary for adequate returns, as too much comes down to the “luck” in manager selection. “The panel doesn’t believe it has magical powers,” added Hornby.
According to data from Financial Times service MandateWire, there have been 12 UK pension fund mandates for the asset class awarded in 2013, compared with 15 in the whole of 2012.
Private equity funds have historically performed well, but going down this route is considered an expensive way of investing, according to Simeon Willis, principal consultant at KPMG.
“The reason [it is] so expensive is the manager starts charging fees on the amount they have committed, rather than the amount that has been drawn down,” he added.
Private equity funds have the ability to generate significant amounts of money when they perform well, but performance often depends on the investment ‘vintage’, which is affected by the wider economic environment.
“So a 2006 vintage will struggle because it is invested during 2008 to 2009 when the crisis really kicked off,” said Willis.
Schemes could try to enhance performance by gradually building up allocations so they are not overly exposed to one specific time period, or by negotiating on fees to drive down costs, he added.
In March, Pensions Week reported on how the Universities Superannuation Scheme had made use of co-investments to suppress fees and improve value for its members.
