PI Partnership – Cambridge Associates
public equities during the 2000–03 technology bust and the 2007–09 global financial crisis, outperforming by 4.8% and 18.4%, respectively, as calculated on a Cambridge Associates mPME basis.
Getting caught up in illiquidity
Investing in private vehicles requires patience. Based on Cam- bridge Associates’ research, the typical private equity fund takes six to seven years on average to produce meaningful per- formance results. To realise long-term success, therefore, trus- tees must be able to stay the course over a long enough period to achieve mature performance. These timeframes are often seen as a major hurdle for trustees committing to private investments. While mature schemes in imminent reach of buyout may need a high level of liquidity, many UK trustees overestimate the amount of liquidity they need. In fact, less mature schemes with a longer time horizon, or schemes look- ing to target a low-risk, self-sufficient approach can benefit from private equity without having to crystallise the program in the foreseeable future.
Current and future liquidity needs, informed by the cashflow profile and the ultimate endgame for the scheme, should help determine the sizing of and types of strategies within the pri- vate investments portfolio. Yet trustees often shy away from private investments and sacrifice its return potential by overes- timating their liquidity needs or assuming all private invest- ments are similarly illiquid.
The cashflow profile of private equity can also vary by strategy and vintage year, in part due to the ebb and flow of merger and acquisition activity and capital markets movements, with ven- ture and buyout funds generally having less predictable cash- flows than say private credit. While exact cashflow planning for a private equity portfolio is not possible, appropriate commit- ment pacing as well as disciplined portfolio monitoring, can help trustees build a suitably cash-generative private invest- ments portfolio.
Doesn’t risk-transfer get in the way?
One of the biggest objections to private equity investing is the assumption that once invested a scheme cannot exit until the program has been completed. Of course, this scenario would be highly problematic for a scheme that had the opportunity to take advantage of a risk-transfer opportunity part way through the investment horizon. However, we have seen an increasing number of pension schemes use the secondary market as a successful way of exiting their program early while still har- vesting material gains. While many UK pension schemes might be de-risking, there are plenty of other investor types who are looking to increase exposure to private equity and want to incorporate secondaries into their overall portfolio strategy. In addition, technology is increasing the connectivity between buyers and sellers which continues to further simplify the disposal process.
Conclusion
Overall, we believe trustees and sponsors should pay extra attention to the growth lever as and when they de-risk, as growth assets remains a vital component of the overall success of the pension scheme. High valuations, lower expected returns and equity market volatility also suggest that schemes stand to benefit from re-evaluating their growth assets and pri- vate equity offers potential greater reward with lower volatility than traditional public markets.
The performance information provided is derived from CA’s performance monitoring data. In keeping with SEC guidelines, it is important to evaluate this information with the following facts in mind: 1. The performance includes investments formed during the client’s effective service dates. 2. Because of the private nature of the investments included in this analysis, CA is unable to track and include portfolios for all clients that have terminated their services with CA. 3. For non-discretionary portfolio management and advisory clients included in this exhibit, the performance may be attributable to factors other than CA’s advice because these clients may or may not follow this advice. As a result, the experience of a client that follows CA’s advice may differ materially from the performance presented. 4. Past performance does not guarantee future returns. 5. Unless otherwise indicated, all foreign transactions are converted to US dollars. Investors’ cashflows are converted based on the average daily exchange rate during the quarter in which they occurred. Market values are converted based on the closing rate of the currency on the last day of the quarter. 6. The performance data is net of invest- ment managers’ fees but has not been adjusted to reflect CA’s management fees and other expenses that a client may incur. A client’s return will be reduced by the amount of such fees and expenses which are described in Part II of CA’s Form ADV. The following example demonstrates the effect, using a model fee, of compounded management fees over a period of years on the value of a client’s portfolio: 1. A hypothetical portfolio with a beginning value of $100 million, experiencing an annual return of 10.00% per annum, would grow to $672.75 million after 20 years, assuming no fees were paid. Accounting for an annual fee payable in advance to CA of 30 bps (0.30%), the same port- folio earning an annual return of 10.00% would only grow to $633.51 million after 20 years. The annualized returns over the 20-year time period are 10.00% (gross of CA’s fees) and 9.67% (net of CA’s fees). Actual fees could be higher or lower depending on services provided.
May 2022 portfolio institutional roundtable: Private markets
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