Private Equity Surpasses Public Market, Report Reveals

New research shows that private equity outperforms public markets over the long-term.

(September 28, 2011) — Returns on private equity have surpassed the public market over the long-term, a new academic paper shows.

The report says: “Despite the large increase in investments in private equity funds and the concomitant increase in academic and practitioner scrutiny, the historical performance of private equity funds remains uncertain, if not controversial. The uncertainty has been driven by the uneven disclosure of private equity returns. While several commercial databases collect performance data, they do not obtain data for all funds; they often do not disclose or even collect fund cash flow data; and they do not often disclose fund names…In fact, the median buyout fund has outperformed public markets. Average venture capital fund returns in the US, on the other hand, outperformed public equities in the 1990s, but have underperformed public equities in the 2000s.”

The paper continues: “…we evaluate two cross-sectional relationships — performance to capital flows and performance to fund size. We find that both absolute performance and performance relative to public markets are negatively related to aggregate capital commitments for both buyout and VC funds…We do not find any reliable relation between performance and fund size for buyout funds. For VC funds, we find that funds in the bottom quartile of fund size underperform. Controlling for vintage year, top size quartile funds have the best performance although it does not differ significantly from funds in the 2nd and 3rd size quartiles.”

The paper — by Robert Harris, Tim Jenkinson, and Steven N. Kaplan and titled “Private Equity Performance: What Do We Know?” — focuses on performance data as of March 2011 for US buyout and venture capital funds from Burgiss, Venture Economics, Preqin, and Cambridge Associates, considering implications for private equity performance.

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“It’s surprising how good private equity has been,” Kaplan, one of the authors of the academic working paper, tells aiCIO. “For every dollar you put into private equity, at the end of the day, you have 20% more than if you left that money in public markets. Over a 5-year to 6-year period, that translates to 3% to 4% more a year in investment return.”

“There’s been a big debate on whether private equity really outperforms over the long-term, and it’s very hard to get good data on this because the people who provide the data are historically closed about it,” Kaplan, who teaches at the University of Chicago School of Business, added.

Earlier research has also been optimistic about the future of private equity. Recent research by Preqin has found that private equity fund managers looking to raise their first funds have reason to be optimistic. According to the research, more than 50% of investors have stated that they will at least consider investing in a first-time or spin-off fund, while performance data suggests that these funds have generated good returns for investors in the past.

“The private equity fundraising environment is extremely competitive, but there is evidence that despite the difficulties, emerging managers are successfully raising funds,” Preqin’s Helen Kenyon stated in a release. “While investors place a lot of importance on a fund manager’s past performance, they are keen to take advantage of highly attractive opportunities. With 36% of first-time fund managers going on to manage top quartile funds, it is perhaps not surprising that more than half of investors in private equity funds will consider backing a first-time or spin-off fund.”

A report earlier this month by SEI and Greenwich Associates showed that private equity is in demand as institutional investors, fund managers, and consultants plan to increase their allocations of the asset class or recommend increases to their clients over the next year, but they are urging greater transparency in the asset class.

The survey from SEI and Greenwich Associates, titled “The Logic of Fund Flows,” found that 26% of investors plan to increase their private equity mandates in the next year. However, investors and consultants differed on their investment objectives regarding private equity. Approximately two-thirds of investors (68%) pointed to return potential as their primary objective as opposed to 10% of consultants. Fifty percent of consultants, meanwhile, said diversification was their primary investment objective as opposed to only 18% of investors.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

CII Report: Institutional Investors Are Unhappy With Executive Pay

Drawing on interviews with investors on why they collectively voted against 37 companies whose pay plans fell short of majority support between January 1 and July 1, 2011, research by the Council of Institutional Investors has revealed that some 92% of institutional investors are unhappy with executive pay relating to performance at the companies they invest in.

(September 28, 2011) — A new report by the Council of Institutional Investors has shown that about 92% of shareholders have expressed discontent over executive pay relating to performance at the companies they invest in.

CII’s research found that 37 companies fell short of majority support out of 2,340 say-on-pay votes at US companies in the first half of the year.

The report — titled “Say on Pay: Identifying Investor Concerns” and prepared by Robin Ferracone, executive chair, and Dayna Harris, vice president, both of Farient Advisors — focused on 2011, the first year say-on-pay voting was required at US companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act. In January, the Securities and Exchange Commission (SEC) adopted rules that would give shareholders at public companies a nonbinding vote on executive compensation packages, reflecting an effort to give shareholders greater authority over executive pay following the financial crisis, when many investors expressed public outcry over extravagant pay practices. Investor advocates, pension funds, and shareholder groups have pushed for such a change.

“Advisory shareowner votes on executive compensation were the big story of proxy season 2011, the inaugural year for ‘say on pay’ at most US public companies,” CII’s report stated. “Say on pay gives shareowners a voice in how top executives are paid. Such votes are also a way for a corporate board to determine whether investors view the company’s compensation practices to be in the best interests of shareowner.”

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The report urged that companies “should respond to investor concerns. The more aligned pay and performance the better,” the report said. This alignment “is a combination of pay sensitivity to changes in performance, the overall size of compensation and the proportion of performance-based pay.”

CII members including the California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS) and New York State Common Retirement Fund cited a range of important factors to explain their reasons to vote against executive compensation, which included poor pay practices (37%), poor disclosure (35%) and inappropriately high level of compensation for the company’s size, industry and performance (16%). Furthermore, the report said that more than a quarter (27%) of the companies with failed say-on-pay proposals were in real estate, homebuilding or construction-related businesses, all hit hard in the economic downturn.

This report specifically examines:

1. The driving factors that fueled majority opposition to say on pay at 37 companies

2. The process investors used to determine how they would cast say-on-pay votes

3. The influence that say on pay is having on executive compensation

4. Potential next steps for shareowners to consider ahead of say-on-pay votes next year

5. Potential next steps for companies where investor opposition to say-on-pay proposals was significant

A recent survey by Towers Watson revealed that the say-on-pay proxy season has had relatively little immediate impact on most public corporations in the US.

“Most companies are breathing a sigh of relief now that the proxy season is over,” Doug Friske, global head of Towers Watson’s Executive Compensation consulting practice, said in a statement. “The same, however, can’t be said for many companies that received an ‘against’ recommendation from proxy advisory firms or failed to win the support of at least 80% of the shareholder votes cast on their say-on-pay resolutions. The survey findings, along with our consulting experience, suggest that these companies are taking shareholder views quite seriously and plan to respond in some way.”



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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