The current downturn in the public markets should be seen by institutional investors as an opportunity to buy both public and private equity rather than a reason to take refuge in bonds. So says Peter Gale of Gartmore who manages the Royal Bank of Scotland's pension fund.
Gale, speaking at this year’s EVCA International Investors' Conference in Geneva, was a panellist at the ‘Allocation Strategies – Past, Present & Future Investor Mind-Sets’ discussion. He said that a contrarian approach to the current economic climate was necessary, disregarding the general shift that has seen investors pour money into bonds.
Although many pension funds in the UK were now wrestling with significant shortfalls in relation to final salary scheme pension plans, Gale was not enthusuastic about actuaries' response which was to recommend increased allocations to fixed income product. Although the stability and predictability of their returns was appealing, the underlying issue of superior returns could not be resolved by buying bonds.
Gale manages the £10bn RBS staff pension fund, which started to invest in private equity in 1992, subsequently increasing its allocation in 1996. The fund currently is allocated in excess of five per cent to the asset class, although Gale said this was the result of the comparative success of its private equity investments, and that expected to see this falling back to the five per cent mark. Gale added that he was looking for his private equity portfolio to deliver a 400 basis point return above the indeces used for other asset classes.
In terms of its private equity allocation, the RBS Pension Fund is focused towards the buyout market and has most recently made commitments to the E4.4bn Third Cinven Fund and BC Partners’ E3.5bn buyout fund.
Gale also said that the increasing trend towards liquidity was a positive step for the asset class and that secondary transactions and securitisations would contribute towards improved liquidity in the sector. Although the fund has not participated yet in any such transaction he felt that this was only a matter of time.
The EVCA panel discussion, chaired by Stefan Hepp, CEO at Swiss-based SCM Strategic Capital Management, also included Armin Braun of the City of Zürich Pension Fund, Marinus Keijzer, chairman of Private Equity Holding AG and Paula Chester, former head of private equity at the New York State Common Retirement Fund.