Private equity is an opportunity, not a threat to pension funds

Commenting on a recent report by Citigroup stating that pension funds will be the ultimate losers in the shift from public to private equity, Hamish Mair, Head of Private Equity Funds at F&C said:

"The report exaggerates how much pension funds have switched or could switch from public to private equity. In fact pension funds have relatively insignificant allocations to private equity, even in the United States. Most UK pension funds still have less than 5% of their portfolios in private equity and even in the US it is rarely more than 10%. This is hardly indicative of a massive switch.

"It is also hard to see how pension funds would be able to "switch" huge amounts from public to private equity. To start with, private equity has a different risk profile to public equities and although investors are compensated for that higher risk through higher returns there is a limit to how much could be invested prudently by pension funds in private equity."

Commenting on the suggestion that applying private company techniques to public equities generates higher returns than the best buyout funds, Mair continued: It is possible to apply private equity techniques to public companies to enhance returns but it is not possible for any one investor to do this across the whole of the mid market. In the individual cases where private equity techniques are applied, such as influencing strategy by joining the board, the investor loses some of the advantages of the public markets. For example, the ability to trade shares would be severely restricted either through being an insider or because of the large size of the holding – an investor would need to hold 10% - 20% of shares in a company to have any real influence. In all cases, however, investors in public companies will not have the same high level of control as would private equity investors."

Commenting on the point that the higher fees of private equity will "ultimately be paid out of hard-earned pensions and savings" , Mair continued: -
"It is true that fees for private equity are higher than for public equity but they are more than justified by significantly better past performance (after fees) than public equity. According to the British Venture Capital Association (BVCA), UK private equity funds returned 16.4% a year over 10 years, compared with 7.9% a year produced by FTSE-All Share and 8.0% a year by WM Pension Fund universe. That is why we see a real and steady demand for private equity from the market and an acceptance of higher fees.