“Private equity still isn’t out of the woods,” Christopher Ailman, chief investment officer of the California State Teachers' Retirement System, recently told PEI.
The $133 billion pension’s private equity portfolio – a little more than 70 percent of which is invested in buyout funds – recently reported a 9.4 percent decline for the 12-month period ended 30 September 2009 – a major improvement from the 30.7 percent drop it recorded for the 12-month period ending just six months earlier.
The distressed debt people will tell you the world’s still going to come to an end.
But many fund valuations remain at lower levels than the pension would like, and while there are indications that things are turning around for some private equity funds, Ailman said it’s impossible to know exactly what will happen. “A lot of debt still is going to come due that has to be recycled and just like we’re seeing in commercial real estate: the banks at first play hard ball, the debt markets are closed and nobody wants to refinance, but nobody wants to take a step back.”
Ailman: Recent vintages are question marks
The best way to characterise the pension’s private equity portfolio at present? “Surviving,” Ailman sighed. “The distressed debt people will tell you the world’s still going to come to an end, but the private equity people will tell you [they’re facing] tough negotiations but it’s all going to work out.”
There are still a lot of question marks for LPs surrounding the performance of funds raised in recent years. “You know that the ‘07 and ‘08 vintage years aren’t going to be too hot, but you don’t know how bad,” Ailman said. Many large institutional investors like CalSTRS have a great deal of exposure to ‘07 and ‘08 vintages and may seek to be more time diversified in the future.
“What you're trying to do now is figure out a plan on how to go forward,” explained Ailman. “Not a lot of people are raising funds; what kind of funds do you want to [commit to]?”
Making matters more difficult is that no one is quite sure if the global economy is headed for a sustained recovery or not. “It’s not like ‘03 or ‘04 where you were coming out of a recession and it was obvious the wind was at your back,” he recalled. “Now you still almost feel like …”, he paused to hold up the cover of the PEI Annual Review 2009, featuring the satellite photo of a hurricane storm system. “You’re not in the eye of the storm, but has the storm cleared or not?”
Read the full PEI interview, in which Ailman discusses a variety of key private equity industry issues, including the controversy surrounding the ILPA Principles.