LP Radar: At the forefront of change

When PGGM proclaimed in August that it intended to reduce paying fees to private equity fund managers as it pursues direct investments, it reflected just how important the issue of disclosure and performance fees had become among major limited partners.

In a report by the Dutch pension fund, Ruulke Bagijn, its chief investment officer for private markets, said: “The current market conditions in which PGGM operates are not the same as envisaged by PGGM. We want to move to a situation in which financial services providers charge better rates and use restrained remuneration structures.”

Increasingly, PGGM will require its external managers to offer detailed transparency and, in the long term, intends to no longer accept anything short of complete disclosure. Unless GPs that do business with the pension manager are not more transparent about their fees over the next six years, the pension will stop doing business with them by 2020.

If an LP like PGGM states that fees will only be paid to those fund managers that generate above average performance – a metric that Bagijn believes must also be agreed upon in advance – it’s high time that buyout fund managers pay attention.

It is to the investor’s credit that PGGM has done more than simply warn financial sponsors or call on regulators to force fund managers’ hands when it comes to sharing more information. It has forged ahead with its own guidelines that expect considerable change in the marketplace on the part of GPs if they are to be deemed worthy of meeting transparency and performance hurdles.

PGGM – a manager of €180 billion on behalf of five pension funds – invests around €2 billion in private equity annually and has committed more than €8 billion to the asset class worldwide. The bulk of its portfolio is comprised of commitments to funds, with co-investments and secondaries making up roughly 20 percent and 10 percent, respectively.

Like many European LPs, PGGM is committed to environmental, social and governance (ESG) standards. In 2012, it established its own guidelines to address these issues. Portfolio companies must comply with relevant environmental, compliance and social laws and ESG matters are taken into account in PGGM’s decision-ma-king process before an investment is selected.

However, the pension group isn’t content to just sit on the sidelines as a passive investor. In July, its private equity team joined a consortium including Abu Dhabi Investment Authority, Danish pension group ATP and Goldman Sachs’ private equity group to buy car hire company LeasePlan for €3.7 billion.

The purchase from Volkswagen and Fleet Investments sees PGGM and its partners investing half of the purchase price through equity. While that is not uncommon, what is unusual about the deal is its break from the traditional private equity model in that none of the €1.5 billion in debt arranged for the purchase was borrowed by LeasePlan.

Interestingly, the company is not responsible for repaying the debt arranged for the acquisition.

The LeasePlan purchase is not the only direct PGGM has done over the past year. In September 2014, it acquired a minority interest investment in Nordian Capital Partners as its general partners spun out from Rabobank with a €300 million second fund (PGGM also bought a 20 percent stake in Nordian Fund I).

In comparison with its US counterparts, the pension group is not huge in terms of allocations to private equity. PGGM maintains a 5.5 percent allocation in line with its target for the asset class. In February, it committed €100 million to the Black River Food Fund 2, while over the summer it became a limited partner in the 1999-vintage Palamon European Equity and 2006-vintage Palamon European Equity II.

PGGM fortified its alternative investment team after selling its stake in fund of funds firm AlpInvest Partners in 2011 amid plans to set up its own direct private equity business. In March, it brought former KPMG professional Wouter van der Geest aboard as an investment manager and named Avedon Capital Partners’ Lisa Brouwer as an analyst.

The pension management organisation isn’t shy about affirming its interest in direct investment. For GPs that don’t comply with its guidance on fees, the implications are clear: “The path we have taken regarding ongoing internalisation will offer PGGM alternatives for investing via external managers.”