Larger institutional investors are demanding more control over their private equity investments, leading at least one firm with both consulting and investment arms to refocus on delivering non-discretionary investments.
Wilshire Private Markets — the investment management subsidiary of investment consulting firm Wilshire Associates, Santa Monica, Calif. — is moving back to its roots.
More than a dozen years ago, Wilshire launched its money management business with non-discretionary investment options, said Kevin Nee, president of Wilshire Private Markets.
Wilshire, like most consulting firms with investment management arms, quickly shifted to discretionary investments after realizing they generated higher fees. Clients investing in a relatively new asset class with small staffs preferred placing the investment decisions in their managers' hands.
Now, the firm is putting more resources into offering non-discretionary separate accounts, Mr. Nee said. Clients “like to have greater control and are demanding non-discretionary and not discretionary solutions,” Mr. Nee said.
Since the financial crisis, private equity investors have become much more demanding, said Daniel Koelsch, senior director in the Toronto office of Standard & Poor's, who covers alternative assets from a credit-rating perspective.
Wilshire isn't alone in noticing the shift in demand, mostly among larger investors. “Some more sophisticated clients are opting for non-discretionary separate accounts,” said David Fann, president and CEO of PCG Asset Management, a La Jolla, Calif., investment management firm. “(It) gives them more flexibility and control as it relates to the allocation management and timing of investments.”
But most traditional private equity firms are staying away from non-discretionary investment strategies because of the typically lower fees as well as control issues, Mr. Fann said. Non-discretionary separate accounts sometimes generate fees at least 50% lower than fund vehicles, he said.
But Mario Giannini, CEO of Hamilton Lane, a Bala Cynwyd, Pa., alternative investment consulting firm that offers discretionary and non-discretionary investments, said that's not the case with consultants. “General consultants have offered non-discretionary services to derive more revenue from their overall consulting business with a client.”
Wilshire Private Markets is now pouring additional resources into its non-discretionary business.
“Previously, discretionary commingled funds and separate accounts had represented the dominant portion of Wilshire's business, but the evolving needs of more mature institutional investors in the private markets ... have led Wilshire Private Markets to a closer level of equilibrium between the two,” said Mr. Nee, who joined Wilshire about a year ago from BlackRock Private Equity Partners, a unit of New York-based BlackRock Inc., where he had been a managing director.
“This mix will be achieved by expanding the current team's scope of responsibilities to concentrate in both areas,” he said.
To aid in the move, Marc Friedberg and Paul Rodgers moved to the Wilshire Private Markets team from Wilshire's private equity consulting business, where Mr. Friedberg was managing director and Mr. Rodgers was vice president.
Mr. Nee said the consulting-type work that Wilshire Private Markets could do includes advice on the best way to pursue investing in private equity. It also could involve “speaking with a plan sponsor about an investment policy on private equity. It could involve building a pacing model to invest in private equity and could involve other things,” Mr. Nee said. “That's the nature of the conversation today with the institutions that want non-discretionary” investment strategies.
