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Is private equity running on a ‘fad cycle’?

UK public pensions have not been seduced into private equity’s growth as successfully as some other investors. Sarah Smart, chairwoman of pensions administrator TPT Retirement Solutions, suggests some reasons why.

Few at the Pensions and Lifetime Savings Association conference in Edinburgh in March saw the private equity asset class as attractive.

Sarah Smart is the chairwoman of TPT Retirement Solutions, which manages around £9 billion ($12.8 billion; €10.3 billion) of assets on behalf of UK pension schemes. She explains the concerns for the country’s retirement plans.

Is it beneficial for pensions to invest in PE?

That is for individual schemes to decide, but there are some things which work against it. The concept of commitment fees is difficult for pension fund investors. I understand why they exist because a bulk of the work happens before you make the investment. But there is a natural resistance among investors to paying for something before you’ve actually invested your money, particularly if that period takes a long time.

And generally, the fee levels are difficult for many. PE still has a bad reputation from the early 2000s, of making money from offering geared exposure to the equity market while taking huge fees off the top.

Are PE funds sufficiently transparent when it comes to fees?

I think fees need to be a lot more transparent. Investors should pay commitment fees but should pay less when the investment is made and more depending on what the manager does. They should really understand whether growth [in portfolio companies] is being delivered from the manager’s direction or by other means.

My personal view is that no performance fees should be paid until all the fund investments have been exited, when you can see what the whole return to the investor is. But I know that’s difficult because the market is [designed] for people to get bonuses every year and how do you pay for that?

The disintermediation between managers and investors in the UK has been very unhelpful and I find consultants’ models to be generally very unhelpful. There should be a much more intelligent conversation between fund managers and private equity investors as to what exactly they are doing, what it costs them and therefore what the fees are.

It makes winning business more costly and time-consuming but I think there’s a danger that private equity just runs on a fad cycle. Investors don’t really know whether managers are good or not.

The 89 UK local authority pension funds are being consolidated into eight schemes and consolidation is also taking place in private pensions. Is this likely to have an impact on private equity?

The hope would be that as investors consolidate they will all, largely, have their own internal teams and become much more informed buyers of the different offerings out there. I think that would be a good thing for the less vanilla offerings like private equity. I look at how much governance time we have within our organisation. We don’t have the time to spend on that.