ITEM PF14
PENSION FUND COMMITTEE – 25 FEBRUARY 2009
INDEPENDENT FINANCIAL ADVICE: PRIVATE EQUITY PORTFOLIO
Report by County Solicitor & Monitoring Officer
Introduction
1. The Pension Fund Committee, at its meeting on 26 November 2008, agreed the recommendations contained in the report relating to the Independent Financial Adviser – Annual Review and Outcome of Appointment Process of New Adviser (PF13E). It also requested the County Solicitor to advise on the processes which need to be followed on obtaining independent financial advice.
Background
2. Within the Private Equity Portfolio there are three types of investment:
2.1. Quoted Investment Trusts – shares are bought and sold by the Independent Financial Adviser (IFA).
2.2. Limited Partnerships – the Committee had agrees (based on advice from the IFA) to invest money in Programme Funds managed by two Fund Managers, Partner Group and Adams Street. These Programme Funds are referred to as Fund of Funds. The Fund Managers then invest these sums in other Private Equity Funds which then invest directly companies.
2.3. Oxford Technology – the Committee had agreed to invest in three Private Equity Funds directly. These are Oxford Technology 3 and 4 which are venture capital trusts and the Oxford Technology Enterprise Fund. These Funds then invest directly in companies.
3. The IFA will advise the Committee on the strategy for Private Equity, just like he would advise the Committee over the strategy for the Fund overall. This would include the total benchmark allocation to Private Equity. Currently this is 6% of the Fund, although the Committee has agreed a range of 6% to 10%. The reason for the unusual range (it would normally be 4% to 8%) is that the Committee agreed to consider increasing the benchmark to 10% in the next six months.
4. In terms of independent advice, the Committee does not presently receive any in relation to the strategic allocation of assets. The IFA gives advice usually, but not always, after prior agreement with officers. If there was any challenge to this it would be provided by the Committee and the Officers. The Committee has received other independent advice on the strategic asset `allocation in the past. In 2002 Watson Wyatt carried out an asset liability study for the Oxfordshire Fund and recommended a strategic asset allocation for the Fund. This report and recommendations were received by the Pension Fund Committee. There was significant cost to this exercise and since 2002 the Committee has used the IFA to determine the strategic asset allocation.
5. Partners Group and Adams Street were appointed via a tender process in relation to specific investments in Private Equity. This Committee agrees periodically to additional investment in specific Funds, e.g. investment of $16m was agreed this year into Adams Street 2009 Programme. The investment in Oxford Technology was following a recommendation by the IFA and officers to the Committee. There may be an issue over other funds similar to Oxford Technology and how these will be identified and agreed. The IFA is not normally in favour of direct investment in this type of Fund, preferring to invest via Fund of Funds.
6. The IFA gave independent advice about the performance of Limited Partnerships. However, he cannot give independent advice about the Quoted Investment Trusts as he acts as Fund Manager. Until December 2008, the practice was for the UBS Investment Banking Division to provide market advice to the IFA covering all the quoted investment trusts, whether Oxfordshire had invested in them or not. The IFA would take this advice into account when making any decisions. The UBS Investment Banking Division was closed in December 2008 and the individuals have transferred to Oriel Securities. Since January 2009, market advice is being provided by both Cenkos Securities and Oriel Securities.
7. The Private Equity Investment Trust Section is made up of about 15 Trusts, so it is possible for them to provide additional commentary and assistance to the Committee with regard to evaluating their performance. The UBS Investment Banking Division have also presented to the Pension Fund Committee in the past. This was particularly the case whenever a Committee Meeting was hosted by one of the fund managers in London. Members may wish to consider whether they might wish to re-introduce something similar.
8. The Limited Partnerships are being managed by either Adam Street or Partners Group and as these Managers have now been appointed following a proper tender exercise, accountability and performance of all their private equity funds lies with them. They are independent and act on behalf of this Council.
9. So far as Oxford Technology is concerned, it is the Committee itself that agreed to invest in three private equity fund directly, OVCT 3, OVCT 4 and the Enterprise Fund and the Independent Financial Adviser does not make decisions in relation to those subsequent investments made in companies made by Oxford Technology.
10. It is the view of Officers that there is already in place a comprehensive arrangement for monitoring the Private Equity Portfolio. Officers prepare a report to the Committee each quarter on the value of every private equity investment that the Council holds and whether they are producing an unrealised profit or loss. Officers also list and report all the transactions undertaken each quarter and report the realised profit and losses. Furthermore, the IFA comments on any of the transactions he has undertaken when he goes through the relevant table with the Committee. Members themselves also have a part to play in relation to the evaluation of the Private Equity Portfolio performance. This process is, therefore, arguably more detailed and transparent than the details of the transactions applied by the mainstream Managers.
Options
11. The options for the Committee in relation to the Quoted Investment Trusts are as follows:
11.1. Current practice – challenge is provided by the trustees themselves plus the Head of Finance & Procurement and other officers attending the Committee plus Tony Wheeler, who is working as a consultant for the Authority at the moment. This last aspect is subject to review. It is proposed to enhance current practice by more formal reporting on the performance of the Private Equity annually, with particular emphasis on Quoted Investment Trusts.
11.2. Appoint another expert in Private Equity to provide a periodic review of the investments in Private Equity, with particular emphasis on Quoted Investment Trusts.
11.3. Review the need for the Pension Fund to appoint consultants to help generally with the management of the Pension Fund. This review was planned as other Pension Funds appoint consultants to work with them generally, whereas the Authority employs them for specific projects only.
RECOMMENDATIONS
12. The Committee is RECOMMENDED to consider the report and decide on its preferred option for ensuring appropriate scrutiny of the performance relating to the quoted investment trusts.
PETER G CLARK County Solicitor & Monitoring Officer
Background Papers: Nil
Contact Officer: Peter Clark Tel: (01865) 81323907
6 January 2009
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