08 May 2007

IPE: Pension schemes shift from fund of funds

Pension funds are increasingly moving away from expensive fund of funds and investing via hybrid private equity plans, according to consultancy firm Watson Wyatt. At the launch of the firm’s latest publication entitled Private Equity Explained Jane Welsh, senior investment consultant at Watson Wyatt, said pension funds were looking more towards private equity because pension funds do not believe the extra layer of fees attached to an “already expensive investment class” is worthwhile.

'Historically, pension funds invest via a fund of funds manager to get the best value, as it is argued that a fund of funds manager can better pick the best managers,' said Welsh. 'Fund of funds is not necessarily the right solution for all. There is a shift away from the balanced manager to a more specialist manager, and we are seeing this in private equity as well,' explained Welsh.

More specifically, Welsh suggested schemes are increasingly looking firms with specific areas of expertise in US buyouts or US venture capital.

UK pension funds, in particular, are now said to be seeking more tailored hybrid solutions by appointing a fund of funds firm for a specific market segment and simultaneously appointing direct managers where they don't need a multitude of managers to get access to a particular market sector. 'This is a bit more demanding in terms of governance, you need a bit more resource,' and not all pension funds have enough capital for this approach, she added.

At the same time, however, Ed Francis, also a senior investment consultant at Watson Wyatt, suggested private equity is unsuitable for some funds. 'Pension funds that are not comfortable to spend the time on planning to understand private equity should pass on investing in the asset class,' said Francis.

Elsewhere in the private equity market, three UK local authority pension funds are investing in Cambridge-based private equity manager Key Capital Partners.

West Yorkshire pension fund, East Riding pension fund and West Midland pension fund have all put money into the company’s maiden private equity fund that was launched in December and closed last week, raising £50m. The fund will provide investments of between £1m and £5m.

Key has put together a new type of structure which is reported to return more value to investors rather than keeping it within the management company. The news comes as local authority pension funds are increasingly seeking investment opportunities in private equity.

© IPE International Publishers Ltd.