Some of the largest public pension funds are lamenting what they view as unfair terms in private equity investing.
They have taken public their gripes about private deals, hoping, no doubt to improve their negotiating positions. They would be better off simply saying no to deals whose terms they don't like.
These funds, which invest as limited partners in private equity deals, have banded together to criticize the general partners who create the deals and manage the investment funds.
Their key criticisms, detailed in a report, include the high management fees and lack of disclosure. Among other top complaints is misalignment of interests between the limited partners and general partners.
But the pension funds' gripes are disingenuous. These are, after all, private deals. The terms, including fees and disclosure, are negotiated. If the terms are too rich for the funds, then they should simply stay out.
The report has some merit in airing one side's position and trying to stimulate debate on issues. The backers of the report - nine of the largest pension funds - certainly should command attention. Among those participating in the study were the California Public Employees' Retirement System, the California State Teachers' Retirement System, the Massachusetts Pension Reserves Investment Management Board and the Minnesota State Board of Investment. In all, the funds represent $500 billion in total pension assets, and $20 billion invested in private equity.
But one has to wonder if the report commissioned by the pension funds is a veiled threat to seek regulation of private equity investments, especially of the terms that general partners may offer. No where in the report is this suggested or implied. But taking the case to the public with the report was clearly designed to whip up support, which ultimately could express itself through public policy.
The funds decidedly are dissatisfied with the current arrangements. They want, as they headlined a news conference on the subject, to "move from the 'back seat' to the 'driver's seat' in structuring private equity partnerships."
Why don't they, as a group, simply put a moratorium on such investing? Or invest only with general partners offering terms more to their liking?
The reasons are simple. They fear they may be giving up superior returns if they boycott some groups. And they hunger for those returns on their huge funds to help meet liabilities.
As the funds note, returns from private equity have been too lucrative too pass up, and general partners offering better terms often don't produce the most promising deals. If a pension fund refuses to go along with the terms of the most successful groups, then the general partners will simply seek other investors.
In other words, it's a sellers' market - at least for now. But investments usually are cyclical. As the cycle for private equity turns down, institutional investors will be able to demand better terms.
Many of the funds' proposals for terms more to their liking make a lot of sense. Certainly many other investors may also favor them. For example, the study suggests general partners should make more a substantial commitment relative to their personal financial wealth as a way to improve the alignment of interests with pension investors.
General partners aren't going to surrender voluntarily. The funds must negotiate harder. They must say 'no' more often. They must reduce the supply of funds. Then they may get what they want.
