The credit market crunch and slump in sharemarkets have combined to stall the growth of super fund investments in big buyout-style private equity funds, at least temporarily. However, the increasing power and influence of funds, combined with more co-operation between them, may change the landscape for private equity managers. Weaven said that ‘asset stripping’ was not necessarily a pejorative term and could be economically justifiable, but perhaps a simple change of management would have the same effect. A manager’s time horizon might influence which course of action it took. “Often the only way to change the management is to own the company because boards are often in a comfortable club relationship with management,” he said.

Financial restructuring and exit strategies, which produce a higher IRR in times when debt is cheap, have also lost their lustre for the time being since they depend on something outside the manager’s control – interest rates. Weaven said there was a “gaping hole” in the private equity market for “long-term active owners” but a move to this style of investing would have to be driven by clients. Pension funds had traditionally been too small to have majority interests in companies because of the necessity to be diversified across companies and sectors. “Also, where they have had the capacity, their focus hasn’t matched their rhetoric, because it’s hard,” Weaven said. “And the funds management industry hasn’t had the capability because their own business model is more suited to the broad market.”

The issue of liquidity with a portfolio of unlisted assets, which Australian super funds have this year been reminded to consider by Australian Prudential Regulation Authority (APRA), was often exaggerated, Weaven said. “If you didn’t make a good investment the exit from any asset class will be awful.” CPP’s Graeme Bevans concurred: “It’s a falsehood to suggest that there’s no liquidity, say, in private equity in India. It’s just as much a problem in public markets. If you try to sell 6-7 per cent of a bank it may take two years to exit.” Reflecting or foreseeing a possible trend to active long-term ownership of assets, IFM was now becoming a repository of business management skills, Weaven said, as well as deal generators.

With lower returns from private equity comes closer scrutiny of fees and charges, as well as the benchmarks used to assess relative skill and performance. The CPP has a very sophisticated method of assessing its managers, building customised benchmarks for each. If a private equity manager buys a retail company, say, the client fund will sell the corresponding GIC sector index. So the manager’s company selection skills are assessed against the performance of the appropriate listed market sector returns, rather than the broad market or other general index. A US example of a funds management firm providing a tailored, partnership-style service to a fund is the “Californian Initiative” undertaken by CalPERS in the past few years. This initiative undertook to invest a small proportion of money into “underserved markets” in the local community as part of a social investing project. Paul Yett, relationship manager with Hamilton Lane, said his firm committed 3 per cent of its capital, as a private equity general partner, into a variety of investments divided between partnerships and directly into companies which provided an additional social benefit above reasonable investment returns.