Agenda item

The Sub-Committee considered a report of the Director of Corporate Resources which sought Sub-Committee approval of private equity (PE) commitments covering 2023/24 and 2024/25. A copy of the report marked ‘Agenda Item 9’ is filed with these minutes.

The Chairman welcomed Mr. Philip Pearson and Mr. Russell Oades from Hymans Robertson (Hymans) who were in attendance at the meeting for this item and supplemented the report with a presentation which is also filed with these minutes.

Arising from the discussion the following points arose:

i.          In response to Members questions it was noted that private equity had done well over the last few years, but it was thought to be unlikely that it would do as well over the next five to 10 years.  However, this would not be an issue provided that private equity continued to pay a decent premium and there was  less risk in listed markets. Statistics suggested private equity would outperform listed markets by an average of 4% which was considered a reasonable premium over the long term and would compensate for liquidity risk.

ii.          When looking at fees, LGPS Central would charge 5bps, whereas Adams Street would charge on average across existing holdings 55bps. It was noted that neither LGPS Central nor Adams Street would charge any performance fees on the global fund. There were fees from underlying managers, the transparency of information on which was difficult to find out. However, good multi managers like Adam Street or LGPS Central would try hard to negotiate decent discounts on the management fees.

iii.          Members were reassured that the way performance fees were structured was to ensure that underlying managers were only paid out on out performance, so underlying funds would have to return above a particular target which would vary between different underlying fund managers and would often only earn the fee when the investments had been realised. Members were further informed that where performance fees were calculated on unrealised gains which were susceptible to market volatility, there was usually some claw back mechanism in the event that performance suffered after the performance fee was paid out.

iv.          With regards to geographic targets Hymans suggested it would be important for underlying managers to have the flexibility to invest where there were opportunities in global programmes. It was noted that it was not surprising that there was significant exposure in the US as a leader in terms of new ventures such as IT and life sciences. The geographic ranges that LGPS Central and Adam Street operated in were consistent with the target allocation ranges.

v.          In response to a question, Hymans confirmed the Pacific rim was a strong area, and PE managers were increasingly targeting developed economies around the Western end of the Pacific. The reason for proposing a smaller allocation to Asia was simply due to the fact that the PE markets were smaller than they were in North America and Europe. Asia was growing and managers were increasingly targeting the area and emerging markets without taking on too much risk. India, China, Indonesia, Turkey and Brazil were also part of the emerging market allocation.

vi.          A Member queried primary investment characteristics that seemed to be softened from PE in 2018 to 2023 and questioned if this was because they had matured. Hymans confirmed that LGPS Central had been challenged on the point, and it had reasoned that the softening of both the number of primary funds they wanted the manager to run and minimum size of a primary fund, had been to enable the allocation of them to experienced managers, who were launching for the first time specialist strategies focussing on a particular area of the PE market, for example, life sciences, or logistics technology.

RESOLVED:

a)    That the report and presentation from Hymans on the Recommended Investment to Private Equity (PE) Products be noted.

b)    That the general cash balances fund detailed below, and which would be called over 2023/24 and 2024/25, be approved:

                           i.          £40million (GBP) be committed to the LGPS Central PE 2023 vintage.

                          ii.          $50million (USD) be committed to the ASP Global Funds 2024 vintage.

                         iii.          A combined £80million be committed to PE in 2024/25 with the split by PE Fund to be decided based on the geography, lifestyle origination channel framework as described in the report and with consultation with the Fund’s investment advisor Hymans Robertson.