How leaner times have increased LP demand for ‘tailor-made’ separate accounts

Limited partners are working with managers to set up tailor-made, separately managed accounts that take into consideration the investor’s taste for fees, investment choices and other considerations not available in traditional funds.

The popularity of separate accounts is growing at a time when many LPs have seen their fund investments drop in value, while they continue paying management fees without receiving distributions.

“This gives you the ability to customise to your preferences, instead of investing in a fund of funds and being one investor of many,” says an investment officer from one prominent US public pension. “You can structure it so you have more rights.”

Apollo Management highlighted the trend in a recent public filing, in which it said it anticipates working with its investors to create more separate accounts, as investor appetite for the tailor-made type funds is growing.
“Institutional investors are expressing increasing levels of interest in SMAs, since these accounts can provide investors with greater levels of transparency, liquidity and control over their investments as compared to more traditional investment funds,” Apollo said in the filing. “Consequently, we expect our [assets under management] through SMAs to continue to grow over time.”

Apollo created a separately managed account with the South Carolina Retirement System called the Apollo Palmetto Strategic Partnership in 2009. The account totals $759 million, including $750 million from the pension and $9 million from the firm. The account had committed more than $250 million to investments “primarily in our European non-performing loan and private equity funds”, the firm said.

The Oregon Investment Council, which manages about $65 billion in assets among several Oregon pension plans, late last year preliminarily approved a $300 million separate account called the International SMID fund with Hamilton Lane. The fund of funds, in which Oregon is the sole investor, will target smaller established and emerging private equity funds of up to $1 billion or €1 billion.

The New Jersey State Investment Council, which manages $68.2 billion in assets, has set up eight different separate accounts since it started investing in private equity in 2005. The pension works with Credit Suisse, Asia Alternatives, Hamilton Lane, Goldman Sachs, BlackRock and Neuberger Berman on separate accounts with various investment strategies set up exclusively for the pension.