Side Letter: PE model questioned, Korea’s NPS misses target, UK pension woes

Is private equity really a superior model of ownership? Two Oxford academics think potentially not. Here’s today's brief, for our valued subscribers only.

Just happened

Consolidation casualties

Jigsaw piecesLower mid-market and emerging GPs in the UK will lose out in pension consolidation, industry participants tell us. In the four years since the UK rolled out plans to pool together 89 local authority pensions, various approaches to access PE more actively have taken shape, but one thing is becoming clear: GPs with fund sizes below £500 million ($603 million; €540 million) are on the losing end, as the minimum ticket size for these pension pools is now too big for them. The winners: large-cap buyouts, often regarded as the safer choice for LPs. Are you a UK-based lower mid-market GP? We’d love to hear your thoughts on this.

Superiority? Complex

Private equity firms are often vocal about their superiority over public market ownership but measuring this is harder than it seems. Writing in Top1000Funds, Peter Morris and Ludovic Phalippou of Oxford University’s Saïd Business School argue that this advantage has yet to be proven, as comparing growth in revenue or profit with the public markets does not account for higher levels of investment by PE firms or shareholder payouts by listed companies. Alternatives could be to look at the gross of fees fund performance on individual deals, but it’s hard to say whether high returns come from timing or negotiating skill; gearing up returns by using higher levels of debt, or from higher earnings growth. In other words: the jury is still out.

Hollyport performance watch

What do you need if you want to scale your funds up by more than 10,000 percent? Stellar performance, that’s what. Hollyport Capital’s 2007-vintage debut was just £6 million; today the niche secondaries specialist is in market seeking $750 million for its seventh fund with a $1 billion hard-cap. Sister title Secondaries Investor’s interactive chart shows all the manager’s first five funds are in the top quartile for multiple and a mix of first and second quartile on a net IRR basis. Sounds like a recipe for a success.


Bridging the LP GP gap. Looking for some tips on how to negotiate fund provisions in a productive way? This podcast from Akin Gump could help. It takes the form of a mock negotiation between a PE firm on the fundraising trail and a pension fund considering re-upping, and explores the tension between what LPs and GPs consider “market”. It touches on all the key terms – from management fees to expense provisions to subscription lines to removal mechanics – and presents both perspectives, showing how an open conversation can lead to resolution.

Korea goals. National Pension Service, the world’s third largest public pension, has failed to meet its global private equity benchmark for 2018. The 639 trillion won ($527 billion; €471 billion) Korean institution generated a 15.35 percent return on its 15.2 trillion won global private equity portfolio in 2018, falling short of its 19.2 percent benchmark. Thankfully domestic private equity delivered, returning 7.9 percent against a 5.2 percent benchmark.

Dig deeper

CalPERS goes big. The California Public Employees’ Retirement System has approved $1.9 billion in commitments, including $550 million to Advent International GPE IX. Here’s a breakdown of the $376.6 billion US pension’s target allocations. Interested in listening in to CalPERS’ next meeting? Use our investor calendar to find out when it is. For more information on CalPERS, as well as more than 5,900 other institutions, check out the PEI database.

Calpers asset allocation chartThey said it

“Private equity firms are willing to pay life-changing rewards to a few individuals who can move the needle in terms of ‘value creation’. Meanwhile, the majority of employees may see their earnings being squeezed and their livelihoods and pensions put at risk by higher debt levels.”

Peter Morris and Ludovic Phalippou of Oxford University’s Saïd Business School discuss the muddy waters of measuring private equity value creation.

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Today’s letter was prepared by Isobel MarkhamAdam LeRod JamesCarmela Mendoza and Alex Lynn

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