Market Volatility Spurs Interest in Private Equity

A total of 23% of investors believe private equity has become more attractive in light of recent volatility in financial markets, Preqin's latest research reveals.

(November 29, 2011) — Amid an environment of market turbulence, nearly 25% of investors believe private equity is more attractive, new data shows.

The findings come from data firm Preqin, whose new research demonstrates that market instability could offer additional opportunities to invest in distressed situations, spurring many investors to seek openings in emerging markets.

“The global financial crisis undoubtedly prompted many limited partners to re-evaluate their private equity strategies,” comments Emma Dineen, Preqin’s Manager of Private Equity Investor Data. “Many have become more cautious and selective when choosing fund managers to invest with. However, despite recent volatility in the wider financial markets, investors generally remain positive about the private equity asset class, and many believe that there are good investment opportunities ahead.”

Dineen says in a statement that while investor appetite is there, the “crowded fundraising market means that investors are well positioned to be selective about the funds they choose to commit to, so the challenge remains for fund managers to market their funds in the best possible way and to ensure that they target the right investors if they are to enjoy success in this competitive market.”

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Furthermore, the research firm’s findings show that more than three-quarters, 76%, of a sample of 300 investors interviewed in October and November 2011 plan to make new fund commitments over the coming 12 months, while 92% expect to maintain or increase their allocations over the longer term, further illustrating their confidence in the asset class. Just 8% intend to decrease their exposure to private equity over the next three to five years.

The greater investor appetite for private equity is illustrated by Kohlberg Kravis Roberts (KKR) and Apollo Global Management being set to manage $6 billion for the Teacher Retirement System of Texas’ (TRS). Earlier this month, each private equity firm announced that it would receive $3 billion from TRS to manage in separate accounts devoted solely to the scheme. According to TRS, the advantages of the new relationships include: improved diversification and potentially reduced long-term investment risk, increased ability to seek out and access attractive investment opportunities, heightened capacity to conduct strategic research, more aligned long-term economics and improved use of TRS’ resources. TRS continued: “Both Apollo and KKR are among the most reputable and successful private investment management firms in the world, and both have been investing successfully for 21 and 36 years, respectively. They bring the abilities of two preeminent industry leaders into the long-term service of the 1.3 million members who participate in TRS. As a result, these strategic partnerships endeavor to establish a sustainable competitive advantage for TRS.”

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

As Russell Investments continues to see strong interest from its US institutional client base in liability-driven investing (LDI), Martin Jaugietis has been named to the newly created role of director and head of LDI solutions.

(November 28, 2011) — Russell Investments has reported that a total of 75% of its corporate defined benefit clients in the United States have now adopted liability-driven investing (LDI) strategies.

That popularity has driven Russell’s Martin Jaugietis to be named to a newly created role: director and head of LDI solutions.

The firm reported that its US-based LDI fixed-income assets under management (AUM) have grown to approximately 50% of the company’s total fixed income AUM in the US as of June 30.

Commenting on Jaugietis’ new role, Michael Thomas, chief investment officer of the firm’s Americas Institutional business, said in a statement: “Russell wanted to have a leading voice to marshal our existing internal resources on LDI and to serve as a dedicated champion and subject matter expert for clients on the topic…Not only will Martin’s advice and perspective be valuable for our consulting clients, but also to plan sponsors that are interested in the liability-hedging component of fiduciary solutions in which we take more discretion over investment management functions.”

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Additionally, Jaugietis noted that corporate plans have become increasingly sensitive to the volatility of funded status, creating a greater demand across Russell’s client base for both advice and solutions. Currently the average Russell consulting client has 38% invested in liability-hedging fixed income, up from 27% in 2006. Jaugietis also noted that as more is invested in liability-hedging fixed income, it becomes increasingly important to have a closer liability-hedging portfolio which requires more sophisticated solutions than simple duration extension.

The spark driving the popularity of LDI within the corporate pension fund universe comes from heightened regulation that demands greater solvency and higher funding ratios, along with the general longing to allow sponsors to focus increasingly on their core business as opposed to being distracted by their pension—often a pestering side problem. In 2006, the Pension Protection Act (PPA), which came into effect in 2008, provided the first set of rules forcing American sponsors to systematically contribute to their pension to carry them to full funding. Between 2003 and 2007, the funded status of plans in the US ballooned from 77% to 96%—a remarkable increase at first glance. But according to a UBS research paper by Francois Pellerin, a heightened level of contributions made by plan sponsors largely fueled the increase—highlighting a prevalent misperception among sponsors that a pure increase in equities got them out of their rut. “In analyzing the liabilities of 500 publicly traded companies with the highest pension exposure, I found that on average, the pension plan was 46% of the size of the company,” Pellerin told aiCIO, adding that “LDI has flourished to control volatility so that plan sponsors can worry about what they’re good at—whether its building cars, making widgets, or whatnot.”

See aiCIO Magazine’s Inaugural Liability Driven Investing Survey.

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