CEM survey reveals private equity partnership details

CEM Benchmarking has completed a review of the private equity investments of 30 large pension funds globally, with an average of $935 million committed to private equity, revealing detail of their partnership structures, fees, and investment stages, timing and regions, and is now embarking on its first ever risk practices project.

Mike Heale, partner at CEM Benchmarking, speaking to conexust1f.flywheelstaging.com from The Netherlands, said the purpose of the in-depth survey on private equity was to better explain to clients the cost differences within private equity programs and whether the costs a client was paying were ok.

The survey found that of the partnership fee structures venture capital was the most expensive with an average fee during the commitment phase of 2.17 per cent, and 2 per cent post investments when the fund was closed; LBOs averaged 1.56 per cent and 1.24 per cent post investment.

The survey asked clients to reveal the details of their partnerships, deal by deal, so partnership fees could be ascertained.

Detailed data from 30 pension plans, including 16 in the US, seven in Canada, three in Europe and four in Australia/New Zealand, were collected including a breakdown of private equity by region, type and fee details.

Overall these funds averaged a net asset value of 3.1 per cent in private equity, with the committed amount of 5 per cent, and had an average net asset value of $935 million of private equity holdings.

Collectively, they participated in more than 1,000 total partnerships, with 57 per cent of partnerships in the US, 17 per cent in Europe, 9 per cent in Canada, 3 per cent in Australia and 14 per cent global.

By far the biggest sector was LBOs with 55 per cent of deals, followed by venture capital 8 per cent, distressed debt 8 per cent , and diversified partnerships of 11 per cent.

“In the CEM database, private equity is the best performing asset class, with a return of 14 per cent per annum over the past 18 years. But it is also an expensive asset class, Heale said. “It doesn’t take a lot of private equity holdings for your fees overall to be quite high.”

“It is very expensive and is growing as an asset class and it is hard to benchmark because it is hard to get meaningful cost data from the funds to compare. Most funds invest via direct partnerships, which include partnership fees and performance fees, and is complicated by the fact that some of the fee income to the general partner is shared income. We want to benchmark gross fees but we were getting a mixture of gross and net.”

Of the fund’s surveyed the median carried rate was 20 per cent, the hurdle rate of return was 8 per cent across all private equity types, and more than 60 per cent of the commitments were made in the past three years.

Meanwhile CEM has just begun a risk practices project with a report due to be completed in early 2010.

“Funds globally have gone through a tough experience in the past couple of years, causing a fundamental re-evaluation. And market, investment risk is a big part of that,” Heale said.

In addition a number of large funds have altered their decision making process to become more risk centric with a focus on risk budgeting and risk relative to liabilities, rather than an asset mix decision dictating market risk.

“We want to make sure we have a grip on the risk measures people are using,” Heale said.

The survey will look at how the risk function is being structured within funds including whether there is a risk officer and who they report to; how it is integrated into investments; risk measures and how they are used.