Private Pools of Capital - Pensions Help to Craft Policy
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According to a September 25, 2007 press release for the President's Working Group on Financial Markets ("PWG"), pension funds are playing an active role in setting policy. Following on the heels of guidelines released in February 2007, one committee, headed by Eric Mindich, CEO of Eton Park Capital Management, seeks to provide the asset management perspective. A second committee, led by Russell Read, Chief Investment Officer of the California Public Employees Retirement System, will represent institutional investors such as pensions, endowments and foundations. Click here to read yesterday's press release.
Drawing on the "Agreement Among PWG and U.S. Agency Principals on Principles and Guidelines Regarding Private Pools of Capital," drafted earlier this year, committee members will consider fiduciary duties. Not surprisingly, decision-makers are asked to consider the adequacy of disclosure, risk and valuation policies. Excerpted text follows.
- 5.1 Fiduciaries should consider the suitability of an investment in a private pool within the context of the overall portfolio and in light of the investment objectives and risk tolerances. Fiduciary evaluation should include the investment objectives, strategies, risks, fees, liquidity, performance history, and other relevant characteristics of a private pool.
- 5.2 Fiduciaries should evaluate the pool’s manager and personnel, including background, experience, and disciplinary history. Fiduciaries also should assess the pool’s service providers and evaluate their independence from the pool’s managers. Fiduciaries should consider the private pool’s manager’s conflicts-of-interest and whether the manager has appropriate controls in place to manage those conflicts.
- 5.3 Fiduciaries should conduct the appropriate due diligence regarding valuation methodology and performance calculation processes and business and operational risk management systems employed by a private pool, including the extent of independent audit evaluation of such processes and systems.
- 5.4 Fiduciaries that determine to invest in a private pool of capital should ensure that the size of their investment is consistent with their investment objectives and the principle of portfolio diversification.
The guidelines merit more than a cursory review. One sentence in particular struck a chord. Citing the importance of news, institutional investors are urged to obtain and analyze data that is both frequent and "with sufficient detail that creditors, counterparties, and investors stay informed of strategies, the amount of risk being taken by the pool, and any material changes." As readers of this blog know, seeing is believing. More than a few asset managers may be unwilling to unlock the keys to the information gateway, citing economic hardship if forced to provide full disclosure. Just a few days ago, the SEC announced penalties for an asset manager who failed to file Form 13F, evidencing their exercise of "investment discretion over $100 million or more." (Note: There is no universal agreement that 13F filings permit "sufficient" information transparency. At least one court case asks whether an asset manager should be forced to file without recompense for the "taking" of added-value that results from "superior" analysis.)
Additionally, access to greater amounts of information does not necessarily beget better information. Even if available data is Goldilocks perfect ("just right"), what happens when pension investors are unable to process what has been received?
It will be informative to see what the two committees create in terms of operationalizing these fine, but arguably broad, guidelines.
