NYCERS: ’10-year limited partnerships are here to stay’

The trend of limited partners making direct investments will not change the way most institutional investors access private equity, according to New York City Employees’ Retirement System‘s interim co-head of the asset class.

Speaking at the British Private Equity and Venture Capital Association summit in London on Thursday, David Enriquez said that while he was “inspired” by Canadian pension funds making direct investments and a large Californian public pension planning to follow suit, the strategy is not suitable for everyone.

“I’ll make the bold prediction that 10-year limited partnerships are here to stay,” Enriquez said. “If the market was to naturally evolve, I think it probably would have happened already.”

A lot of smaller LPs who cannot make hundred-million-dollar commitments still need to access private equity via traditional funds.

“I wouldn’t want a fund investor, an institutional investor with a different type of skillset and background, to start doing direct deals. I think that’s the key thing, having the right skillset,” he added.

New York City’s five retirement pension systems have a combined $195 billion in assets, $20 billion of which is in private equity.

In addition to reducing the amount of fees paid to external managers, limited partners have been making direct investments for varied reasons. Abu Dhabi Investment Authority, the world’s second-largest sovereign wealth fund, said last year it had increased its exposure to direct private equity investments amid fears of a potential drop in returns. It cited a combination of high valuations, increasing competition and rising interest rates in the US as potentially dampening future absolute returns for private equity, in its annual report for 2016.

Others, such as Canada’s Caisse de dépôt et placement du Québec, have cited the ability to select the types of assets it feels will be more resilient amid a potential downturn.

Florida’s $196 billion State Board of Administration has mulled going direct, according to documents published at the beginning of last year. After robust internal discussion it ultimately passed on the proposal, citing a lack of internal staff resources.

Enriquez also said he appreciated that some investor relations teams at GPs have evolved to the point where they can provide portfolio overview information in real time.

“There are some GPs who are now starting to establish a chief co-investment officer because the IR team is over taxed in terms of their responsibilities, and that allows that centralised function to interact with the LPs on these co-investment syndications,” he said. “We’re seeing the IR function itself evolve and become more mature and better resourced.”