LPs have capital, big expectations, for managers

LPs at Wharton’s 2011 private equity conference said they will continue cutting back on GP relationships, and will consider making commitments to new managers who are good enough to replace existing relationships.

The Carnegie Corporation of New York, a foundation that invests in private equity, only made two commitments to the asset class last year. 

Carnegie will hold its first investment committee meeting of the year in March and will consider making nine commitments to private equity funds, and two to private real estate funds. 

As a sign of the times, even though Carnegie is considering making more commitments this year than last, all but one of the potential investments are re-ups with existing general partners. 

Like many limited partners, the foundation has been “winnowing down” its private equity portfolio to make it more manageable for the small staff that oversees the asset class. The financial downturn actually made it easier for the foundation to determine which managers to keep. 

“Everybody’s coming back to the market together in 2011, and clearly we cannot support them all,” said Kim Lew, director of investments at the Carnegie Corporation. 

Everybody's coming back to market in 2011, and clearly we cannot support them all.

Kim Lew

A panel of LPs talked about their outlook this year at Wharton’s 2011 Private Equity and Venture Capital conference in Philadelphia in February. All the panelists agreed 2011 would be similar to 2010 in that they would continue cutting down on the number of GP relationships in their private equity portfolios. 

One difference this year, according to panelists, is that they are considering new commitments, though mostly re-ups with the managers they haven’t “winnowed out” of their portfolios. New managers will have to do a lot of convincing to get capital.

“I tell them [new managers], you’re going to have to replace somebody in my portfolio,” Lew said. 

Lockheed Martin’s corporate pension tries to stick with a core group of managers and keep a concentrated portfolio, said Maria Kozloski, managing director of private markets. The pension would consider new relationships, but only with managers “who can show they do add value [and that means] they tend to be value adders in down and up markets”. 

New managers would need to prove they can beat existing managers in the portfolio, and importantly, they must be able to do it consistently, according to Andrea Kramer of Hamilton Lane. 

“If they can beat the funds in our portfolio, and beat them and replicate it, not just one time, but if they’re consistent in hitting that benchmark, then we’re interested,” Kramer said. “They have to do that to replace one of our current fund investments.”

Panelists also talked about using the secondaries market to manage their portfolios. 

Lockheed Martin was able to find some buying opportunities in the depths of the downturn, Kozloski said. “The opportunities came to us because of specific relationships,” she said.

Carnegie has used the secondaries market for portfolio management, but declined to sell during the downturn, Lew said.

If they can beat funds in our portfolio, and beat them and replicate it, not just one time, but if they're consistent in hitting that benchmark, then we're interested.

Andrea Kramer


“We were not going to sell into that market, how could you justify [selling at a steep discount]? Some [institutions] had to because they were severely over-allocated to private equity,” Lew said. “We raised our allocation so we weren’t in that situation.”

The emerging markets are also a market of choice this year for many LPs, according to the panel. 

“US and Europe are restructuring markets … we like the emerging markets quite a bit, we look for local groups that have good contacts and good access,” said Richard Slocum, director of portfolio management with the Robert Wood Johnson Foundation. 

Carnegie is “over-weighted” to emerging markets, though the foundation only looks for opportunities in emerging economies that have viable public markets, Lew said. “We focus on areas where we have some way to due diligence,” she said.

A challenge with investing in emerging markets-focused funds is figuring out the calculation to price risk, Kozloski said.

“Somehow still, no one has the answer to that number,” she said.