Salient Angles Towards Retail Market with Acquisition

Salient Partners—best known for its outsourced-CIO (OCIO) and risk parity offerings—has inked a deal to purchase liquid alternatives specialist Forward Management.

The deal will add roughly $5.5 billion to Salient’s $21.5 billion under management, which will continue to be led by acquiring firm CIO Lee Partridge.

“OCIO isn’t the main focus of the business right now.” —Lee Partridge, SalientCurrently, OCIO assets account for roughly half of Salient’s investor capital, while ’40 Act structures—including mutual funds and liquid alternatives in other vehicles—represent $4 billion. Adding Forward’s assets would tip this balance towards Salient’s long-term strategic plan.

“OCIO isn’t the main focus of the business right now,” Partridge told CIO. “Our focus is more on the investment management side. The vision is to have $50 billion in assets under management over the next five years, representing a nice mix of about 50% mutual funds and 50% separately managed accounts and institutional comingled funds.” That half-and-half weighting, he continued, “is indicative of the desired retail/institutional mix going forward.”

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Not only does institutional money dominate Salient’s business at the moment, but nearly half of its assets under management belong to one client: the $10.5 billion, wholly-outsourced San Diego County Employees Retirement System. Amid much internal strife, the board has begun searching for an internal CIO.

The Salient-Forward marriage would both take advantage of the unstoppable shift from defined benefit retirement plans to defined contribution, Partridge said, and the companies’ natural cohesion.

“We’ve been talking to Forward off and on for the last four or five years,” the CIO explained. “It’s a very complementary transaction that gives us a lot of scale and growth potential.”

Salient’s staff will grow by roughly 100 members to upwards of 250, including more than 50 sales people. According to Partridge, Forward’s key investment professionals have signed on to stay following the transition, and will continue to work out of their San Francisco offices.

A definitive purchase agreement has been reached, and the transaction is expected to close in the second quarter of this year.

The private equity giant refunded certain fees following a US Securities and Exchange Commission examination, but some pensions reportedly discovered the true circumstances only through media reports.

Leading private equity firm KKR is facing criticism for lack of transparency from some investors about fee refunds that were prompted by a US Securities and Exchange Commission (SEC) examination.

Several US public pension plans have come forward to say KKR informed them of credited fees in early 2014, but failed to disclose why it decided to reimburse the charges.

The SEC reviewed KKR’s 2011 and 2012 activities and found the private equity giant incorrectly charged some expenses and failed to disclose collections of certain fees, according to an investor document filed the following year.

“The SEC concluded that certain ‘strategy expenses’ including senior advisor fees, research fees, and broken deal expenses should have been allocated differently among investment vehicles,” KKR said in the document.

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Following the SEC’s critical “comment letter,” the firm said it refunded about $8 million to investors in early 2014.

In an earnings call Tuesday, KKR’s Head of Investor Relations Craig Larson said the firm’s dialogue with the SEC is ongoing and added the majority of the refunds were “related to the allocation of expenses between what we call our flagship private equity funds and co-investment in other vehicles that invest alongside of those funds.”

However, certain pension plans said they were not informed of the SEC’s review until the Wall Street Journal reported it last month, and expressed concern about the firm’s transparency.

Denise Nappier, Connecticut’s state treasurer, confirmed that the state’s $29.4 billion pension fund received a fee credit of nearly $69,000 in March last year, but was unaware that “a portion of this credit was specifically attributable to KKR’s fee allocation policy questioned by the SEC” until January 2015.

“I am concerned with the manner in which the specifics of this fee credit came to light,” Nappier said. “My expectation is that there will be far greater transparency going forward.”

The Los Angeles County Employees Retirement Association and the Washington State Investment Board were also reportedly unaware of the SEC exam until they contacted KKR for an explanation of the refunds.

KKR said it takes its fiduciary duties and communication with limited partners very seriously and is “disappointed to learn about any concerns.”

“We communicate regularly with our limited partners, including our fund advisory committees, on this topic and other fund matters and we will continue these important dialogues,” the firm said.

The SEC has found overwhelming evidence of and an “enormous grey area” in hidden fee collection from examining private equity firms since 2012, according to the regulator.

“Many limited partnership agreements are broad in their characterization of the types of fees and expenses that can be charged to portfolio companies,” Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, said last year. “Poor disclosure in this area is a frequent source of exam findings.”