Oxford 2018

Oxford U. fund knocks private equity

Investment opportunities in private equity are thin on the ground, argued Sandra Robertson, chief investment officer and chief executive of the UK’s £3 billion ($4.3 billion) Oxford University Endowment Management (OUEM), which manages assets on behalf of 32 investors, including the University of Oxford, 25 colleges and six associated charitable trusts.

“There are pockets of opportunity,” Robertson said, speaking at a panel discussion during the Fiduciary Investors Symposium at the university. “But there is a huge amount of capital chasing everything, all around the world. There are no barriers to entry, anyone can raise a fund. Investors are also allocating because they have made good returns in the past and are making that assumption going forward.”

Robertson also noted that access to the best fund managers is difficult because the top-quartile general partners tend to handpick their investors and limit their fund size.

Success in private markets also depends on having a meaningful allocation, something she said some funds lack.

“Having 5 per cent to 7 per cent to alternatives is meaningless because of the fees,” she said. “I don’t have a magic number but it’s not worth dipping a toe in.” OUEM has a 24.5 per cent allocation to private equity that it has built up over the last 10 years. It invests directly in funds and has about 15 general partner relationships, Robertson said.

At Canada’s OPTrust, which manages C$20 billion ($15.9 billion) in assets for 87,000 former and current public-service employees in the province of Ontario, success in private markets depends on robust relationships and alignment, said Morgan McCormick, OPTrust managing director of private markets and head of Europe. The fund, which invests directly in infrastructure, and via funds and co-investment in private equity, also links its success to a 20-strong internal team. This in-house ability has enabled OPTrust to embark on co-investment, which has brought down fees, McCormick said. This also means the fund can increasingly negotiate deal by deal. The team’s ability to work “on the ground” and navigate different geographies is also important in private markets. OPTrust has offices in Canada, the UK and Australia.

Investor enthusiasm for private equity has remained blighted by high fees and a lack of transparency, argued Ludovic Phalippou, associate professor of finance in the Saïd Business School at Oxford University. He pointed to the recent decision by the Norwegian Government to continue to bar its $1 trillion sovereign wealth fund from private equity, despite the fund’s wishes and the recommendation of a government-appointed expert group, as proof that the asset class still had opacity and cost problems.

“Norway is not comfortable with the model,” Phalippou said. “It is in the best interests of fund managers to fix the model, improve transparency and create cleaner contracts, as this creates a sustainable asset class.”

Despite the challenges, Nalaka De Silva, private markets investment specialist at Aberdeen Standard Investments argued private markets would play an increasingly important role in asset allocation because of the diversity and return these allocations bring. He said investors in public markets were frustrated by an increasing number of companies not making it to the initial public offering stage. Moreover, private-market investment in infrastructure and young companies is an important driver of economic growth. He said a swathe of European regulation, such as the Markets in Financial Instruments Directive, would make investment in private markets more transparent and “level the playing field”, but could also curtail management of private assets and make it even harder to invest with top-tier managers.

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