Over the next few months, two massive pension fund managers will clarify their strategies for private equity. The interesting question will be — will the pension managers APG and PGGM move more into direct investments like many pensions in Canada, or stick with fund investing?
The Carlyle Group’s acquisition of AlpInvest Partners, one of the biggest limited partners in the industry, has various implications, the most important of which is the expansion of the private equity capabilities of the two Dutch pension managers that sold AlpInvest.
APG, which manages €265 billion of assets, is understood to be reviewing its in-house private equity operations to determine how to proceed without AlpInvest, including expanding direct investment or co-investment capabilities. APG wants to have the review done by the summer.
It's not clear if AlpInvest's other former owner, PGGM, with €100 billion of assets, is engaged in a similar review, but it is understood the pension manager wants to expand its in-house private equity operations.
Both pension fund managers have allocations to private equity. APG allocates 5 percent and PGGM 6 percent to the asset class, according to PEI’s data source Private Equity Connect.
The question hanging over the industry is whether the pension managers, with their huge pools of capital, will choose direct or fund investments. Likely it will be some combination of the two strategies.
Any move to slow down fund investments would be a long process. The pension managers have guaranteed a €10 billion commitment to Alpinvest as part of the Carlyle deal.
However, by expanding direct investment capabilities, the pension fund managers would be making a move that more limited partners than ever are following. LPs have developed an appetite for more control over their private equity programmes through direct investing or co-investments, especially as private equity fund returns sank in the financial downturn, while management and other fees did not go away.
The two most prominent US public pensions, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, have both developed in-house co-investment programmes. Other pensions systems have hinted that they would like to do the same. Likewise many sovereign wealth funds have become major direct investors as well as traditional LPs.
As more institutions beef up their direct investment capabilities and scale back their fund commitments, GPs could find fundraising an increasingly tricky process. GPs will also feel more pressure to justify, through track record, why LPs should trust them with their capital and pay them fees.
In the case of APG and PGGM, their commitment of €10 billion to AlpInvest over the next four years shows that a fund investment programme will continue to play a major part in their exposure to the asset class. What happens in four years' time, however, we will have to wait and see.