Pensions Query Private Equity and Venture Capital Funds

Posted on March 14, 2009 by Susan Mangiero

According to Wall Street Journal reporter Heidi N. Moore, investing in certain private equity funds may no longer be a walk on the beach. Not content to sit passively on the sidelines, "Pension Funds to Private Equity: ABCD. Always Be Closing Deals." (March 13, 2009) describes a desire to shift power to pensions, endowments and foundations, away from portfolio managers. Cited reforms include: (a) contracts that mandate the return of money to limited partners within a pre-specified period, thereby truncating fees earned by private equity funds (b) clawback arrangements that allow general and limited partners to equally participate in big wins and (c) detailed evidence that committed monies are being invested rather than left idle.

In a related article entitled "Venture Capitalists Chart a New Course" (March 13, 2009), Wall Street Journal reporter Pui-Wing Tam writes that some venture capitalists may be moving outside their comfort zone by investing in distressed assets and public companies via "registered directs" and private investments in public equities ("PIPES"). Brandon Park, a financial professional who invests in venture capital funds on behalf of institutional investors is quoted as saying that "many venture funds have charters that allow a certain percentage of assets -- typically 10% to 15% -- to be invested in assets other than private start-ups."

Indeed, there are many changes afoot in the private capital arena. They potentially impact if, and how much, pensions, endowments and foundations allocate to this asset class.

  • The credit crisis has made it difficult to do deals that depend on leverage.
  • The time period before which a company is likely to go public or be acquired has lengthened, often forcing a general partner to (a) hold onto a portfolio company for a relatively longer period of time and/or (b) possibly requiring additional cash infusions by that general partner as a result of a longer holding period.
  • Some private capital partnerships are not establishing new funds. As a result, their need to preserve cash (i.e. to keep existing companies afloat) may create even more friction for limited partners which want to see new investments being made.
  • If passed into law, a proposed rule to change the way carried interest is taxed for general partners could impact fees charged to limited partners.
  • FAS 157 applies to many alternative funds and remains a due diligence item for institutional decision-makers who must understand valuation policies and procedures for "hard to value" asset pools. 

A big plus is that some private equity and venture capital funds find themselves in an enviable position to pick and choose from a bevy of investments as entrepreneurs find more traditional funding paths closed to them. Ultimately, realized returns, ownership privileges and qualitative practices will influence how much money pensions, endowments and foundations continue to plow into non-public opportunities.

Editor's Note: Here are a few resources for interested readers.

Tags: , ,
Trackbacks (0) Links to blogs that reference this article Trackback URL
http://www.pensionriskmatters.com/admin/trackback/118593
Comments (0) Read through and enter the discussion with the form at the end
Post A Comment / Question Use this form to add a comment to this entry.







Remember personal info?
Send To A Friend Use this form to send this entry to a friend via email.