Pleasure and pain: Channel Islands and pensions

 A GOOD MONTH FOR…

The Channel Islands, which the European Securities and Markets Authority (ESMA) has recommended receive pan-EU marketing passports provided to managers under the Alternative Investment Fund Managers Directive. ESMA reviewed the regulatory regimes of six countries to determine which non-EU managers should be extended the passport, giving its blessing to Switzerland — provided it pass proposed legislative changes — and the Channel Islands. The US, Singapore and Hong Kong still await ESMA’s opinion. GPs outside the Channel Islands will need to continue using individual sovereigns’ private placement regimes until EU policymakers make a decision, which the directive requires by 2018. Cue a spike in Channel Islands property prices…

European heavyweight EQT, which held a first and final close on its seventh buyout fund on its €6.75 billion hard cap after just six months in market. Investor interest for the vehicle, which was targeting €5.25 billion, reached around €11 billion, and the EQT team made a GP commitment of more than 2 percent. An interesting characteristic of the vehicle is its six-year investment period, giving the firm more time to deploy the capital in a tough buying market. EQT is still investing its 2011-vintage €4.82 billion EQT VI, which is thought to be close to closing its final transaction.

European small- and mid-cap funds, which received the blessing of the Akina Group and private equity scholar Oliver Gottschalg  as providing better return performance. The study of 771 mature European and North American primary buyout funds with vintage years of 1998 to 2007 found that PE portfolios constructed of small- and mid-cap funds managed by European managers offer LPs a better return performance than those concentrated on large-cap North American and European buyouts. The study also confirmed that a diversified portfolio reduces risk, but a portfolio containing more than 20 funds reduces the benefits of this diversification.

A BAD MONTH FOR…

US outfit Castle Harlan, which is cutting back its operations by halting fundraising efforts for its sixth investment vehicle. The firm was in the process of forming CHI Private Equity as a new unit to raise the fund, but is no longer accepting new subscriptions and will revoke the commitments that have been made so far. The firm will spend the next several years continuing to manage its $1.2 billion Fund IV and $800 million Fund V, and keep the option of fundraising at a later date. Howard Morgan, Tariq Osman and Heather Faust, who were running CHI Private Equity, will leave the firm, with Osman and Faust serving as independent directors.

Industry lobby group the Private Equity Growth Capital Council (PEGCC), whose president and chief executive Steve Judge is leaving his post after eight years. The industry’s frontline defence against onerous regulation or new taxes has already begun the search for Judge’s replacement. Under his leadership PEGCC expanded membership beyond the industry’s largest buyout shops into one also serving the needs of mid-market players. It also recently began hosting job-specific outreach events, including its first annual “Chief Financial Officers’ Day” late last year. Judge, you will be missed.

US state pension funds, which are being short-changed by private equity funds, according to research from US think-tank the Maryland Public Policy Institute. In a report entitled Wall Street Fees and Investment Return for 33 State Pension Funds, private equity was singled out for generating inferior returns. Apparently state pensions typically allocate 10 percent to the asset class, which underperforms relevant public indexes once fees are included. In fact, the report’s authors claim that PE has yet to offer proof that the asset class consistently outperforms the relevant public equity market index after fees, and that state pensions would be better off indexing the stock market.