Outlook 2014: In search of better fund terms

While contractual GP-LP alignment has got better in recent years, terms still need to improve in 2014, according to PGGM’s Eric-Jan Vink.

PGGM has been building out its private equity team since the sale of its interest in AlpInvest in 2011. The group’s private equity team, which is led by Eric-Jan Vink, a former partner at Gilde Buy Out Partners, has grown from one to 15 professionals, including the hire of former Permira executive Wouter Snoeijers as a director earlier this year. 

In 2014, the pension fund administrator will continue to push for better fund terms, according to Vink. “While the contractual alignment has improved slightly in recent years, very little steps have been taken. I do think the terms in the industry need to improve. Reducing the costs of investing in private equity and improving the terms of the sector in general are vital, because institutional investors will always ask themselves whether it is attractive to invest in private equity.”

So far, he says, he has only seen “marginal improvements” when it comes to management fees and other costs.

“Although we are a big investor, it remains difficult to negotiate fund terms, especially when it comes to the successful managers. At PGGM, we will continue to focus on keeping the costs of investing in private equity reasonable, whilst delivering superior returns – this is an important goal for us.”

One way of doing that is to focus on co-investment opportunities, Vink points out. “We have had a strong and stable co-investment deal flow in 2013, which I expect will increase into 2014. For us this is very important, because it is a way to reduce the cost of our private equity exposure.”

Additionally, PGGM will continue to push GPs on environmental, social and governance issues (ESG), Vink says. “ESG will be an important focus going into 2014. [It] is an ongoing trend, especially in Europe, and I expect GPs will spend more time reporting to LPs about the improvements they make in this area.”

In general, 2014 will be “an interesting year”, according to Vink. “I expect a couple of successful firms that raised in 2010 will already [be returning] to the market. In addition, the firms with funds dating back to 2007 that have delayed fundraising because it took them longer to invest these funds will [also] return to the market.”

LPs will also have more interest in Southern Europe, he believes. “It’s clearly a region where investors haven’t been active in recent years. But I believe those markets are recovering now – especially Spain – and [that's] very interesting.”

That said, the region is not out of the woods yet, according to Vink. “It looks like economic conditions have improved, but there are also still many portfolio companies that are struggling. I do hope that the slight improvements we have seen in the general European economy will lead to increased confidence among institutional investors and businesses.”