There’s a trend among large LPs to agree separate accounts with fund managers, allowing them to secure better terms and tailor investments. CalSTRS recently spoke to its board about permission to do separate accounts, so you must think they’re a good thing for the industry?
I’m disappointed that the cost savings achieved in those separate accounts are not being passed down and shared with the broader industry. But as a large fund, I can only look out for myself … and, you know, we’ve talked for a long time [about the fact] that the fee structures made sense when they were small, immature firms, but now that they’re large, mature and in some cases asset management firms, these fee structures are illogical. The key is we want flexibility … [to] consider if we want to invest as a straight LP or [via] a separate account.
What keeps you awake at night when you think about the private equity programme?
The private equity programme doesn’t keep me awake at night, it’s Europe and underlying risks in other areas [worrying me]. But … we’re still trying to see how all of the ’07 vintage years will work out – when do we get our money back and what kind of return pattern do we see? It’s a drag as we invest going forward and we need to work through that. If, as I fear, it’s [going to be] a slower [growth] economy and tougher to unwind these investments and realise any kind of returns, then [the issue is] going to hang with us for a longer period of time … much like Greece and the European issues; these things aren’t resolved over night, they’re going to take a long time to work out because there’s so little economic growth.
So your main concerns are macro issues?
Exactly. I came back [recently] from a gathering of global CIOs and everybody brought up the fact that it is much harder to invest now … the global problems are so complex, so deep. Historically, I don’t think my board has ever had to track 10-year bond yields in Italy, Spain and Greece, but my board now knows them weekly and realises that matters to how the US is doing, [as does] whether China orchestrates a soft landing or not. It is a global economy that’s intertwined and interconnected and that makes it much more complex to understand, navigate and track. Part of my job is to go up to the crow’s nest and look out on the horizon, and it’s still very muddled so it’s hard for me to feel good in that kind of environment. But as Warren Buffett said, you need these kinds of dislocations in the market to find unique opportunities, and it is a competitive environment to find those opportunities.
So we may look back and find this was one of the best vintages ever?
I’m not that optimistic. One of the stats we share with the board is EBITDA multiples on big deals and mid-sized deals, and [if using colours to indicate levels of concern] that’s in the edge of the green, almost yellow – in other words it’s fairly high pricing. If EBITDA multiples were really low, I’d say this was a great time to buy and this will be one of the best vintages ever, but prices are still pretty [high] for the best deals and the best deals go to auction. So it’s hard to get excited about that.
What’s your expectation then for funds’ performance?
If you look back in the ‘00s and the ‘90s, people expected a 500 basis point return for private equity and they got that and more. Just about every [LP] I talk to [has] ratcheted down their expectations to maybe 300 [basis points] over the public markets and I think for the first time that’s going to be a really tough thing to beat over five years, over 10 years.