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ITEM PF17
PENSION
FUND COMMITTEE – 26 NOVEMBER 2004
PRIVATE
EQUITY
Report by
the Head of Finance & Procurement and the Independent Financial Adviser
Background
- Up to 1990 the
Pension Fund invested in private equity on a piecemeal basis through
private unquoted funds where the investment had to be held for seven
to ten years until all the underlying investments had been sold and
the proceeds returned to subscribing institutions. Without financial
advice the private funds selected for the Pension Fund produced a mixed
performance, with one out of the four funds more than doubling the amount
invested, another just producing a profit and the other two making substantial
losses during a period when quoted equity markets were very strong.
- In 1993 the then
Investment Sub-Committee agreed that no further money should be invested
in unquoted private equity funds, but in future investments in private
equity should be made through quoted private equity investments trusts.
A portfolio of such quoted private equity investment trusts was steadily
built up first to 2% of the total assets of the Pension Fund and more
recently to 3%. Since such investments trusts are quoted, the portfolio
has been actively managed, with trusts being sold when it was judged
the underlying investments had achieved their potential and the proceeds
invested in a different quoted private equity investment trust. The
performance of the portfolio has been good and added value to the Pension
Fund as the following figures show.
As at
30 September 2004
|
Performance
|
3
years
|
5
years
|
10
years
|
|
|
|
|
|
|
Private
Equity
|
+
2.4%
|
+
2.4%
|
+
7.6%
|
|
|
|
|
|
|
Total
Pension Fund
|
+
3.1%
|
+
0.6%
|
+
6.8%
|
Current
Position
- The target range
for private equity was increased from 0 - 2% of total asset to 0 – 4%
in May 2001. Subsequently the asset allocation for private equity in
Oxford shire’s customized benchmark, which has been effective since
March 2003, is now 4%. However, the actual amount invested in private
equity has never been more than 3%. The market is quoted private equity
investments trusts is not large and the choice of such trusts is further
limited by the fact that the underlying portfolios of some trusts will
be at a stage that make them unsuitable investments or the market price
of the trusts make them unattractive. Moreover, some of the private
equity investments trusts currently held within the Pension Fund’s portfolio
of 3% of total assets have, what may be described as only a nominal
quotation, which is where the volume of transactions in the shares is
very low or even non- existent, with the result the market price can
be misleading and there would be little prospect of buying or selling
a large block of shares at the market price. Oxford Technology falls
into this category, as do Schroder Private Equity and Standard Life
European Private Equity to a lesser extent (see annex 1 for current
portfolio) (download as .xls file)
- Therefore, in
order to lift the Pension Fund’s investment in private equity from 3%
to 4% of total assets it will be necessary to invest again in unquoted
private funds, but on a structured basis. This essentially means through
a fund of funds, where a specialist manager operates a fund, which invests
in a carefully selected spread of unquoted private equity funds. The
disadvantages of such an approach are the extra layer of management
fees and a total lack of liquidity.
- Adam Street Partners,
who are part of the UBS Group, are specialist private equity investors
and have been operating since 1972. They currently manage US$9.5 billion
(£5.3 billion) in private equity assets spread over 285 private funds
and 35 direct investments in unquoted companies in the US, Europe, including
the UK, and to a lesser extent the far East. There is a team of 22 people
selecting and monitoring the underlying funds and direct investments,
apart from those covering client services and accounting. The investment
team is constantly visiting private equity funds, both to monitor funds
currently held in the portfolios and to seek out new funds. Less than
20% of new funds visited are subsequently invested in, while some 20%
of funds held are pruned from portfolios over a ten-year period, because
of either management or investment style changes or declining performance.
- Adam Street Partners
operate three funds of funds in private equity, namely Global, US and
non US. Their fees are an annual management fee of 1% plus a 10% incentive
fee (or carried interest) on all net profits realised and distributed
on purchases of funds in the secondary market. (Funds are normally bought
in the secondary market at a substantial discount to net asset value.)
The fees charged by the Managers of the underlying funds are usually
in the region of an annual management fee of 2%, plus a carried interest
of 20% of the profits on the realization of the underlying investments
after all the original capital subscribed by investors has been returned
to them. In spite of this double layer of fees, Adam Stuart Partners
have achieved very good absolute performance and over half the time
top quartile relative performance (see annex 2 – the performance
is measured on the basis of cash subscribed and cash returned to investors)
(download as .doc file)
- Mr. Wheeler and
the Independent Financial Adviser have both visited Adam Street Partners
separately and are impressed with both their personnel and structure.
An investment in their Global Fund of Funds, with its geographical special,
would be the most suitable fund for the Pension Fund. The minimum investment
is US $10million (£5.6 million), which would lift the Pension Fund’s
investment in private equity to approximately 4% of the total assets.
Currently the Global Fund is closed to new subscriptions, as Adam Street
Partners do not wish to handle more money than they can comfortably
invest in their choice of underlying private equity funds. However,
the fund will re-open for new subscriptions at the beginning of 2005.
Currently five local authorities invest in Adam Street Partners Funds.
These are Cheshire, East Sussex, Enfield, Hillingdon and Leicestershire.
RECOMMENDATION
- The Committee
is RECOMMENDED to invest US$10 million (approximately £5.6 million)
in Adam Street Partners Global private equity fund of funds when it
opens for new subscriptions at the beginning of 2005.
SUE
SCANE
Head of Finance
and Procurement
A.F.
BUSHELL
Independent
Financial Adviser
Background
Papers: Adam Street Partners presentation booklet
Contact
Officer Tony Wheeler, Pension Fund Investments Manager Tel (01865)
815287
November
2004
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