Still capital left

Jay Fewel, director of investments at Oregon Investment Council called dire predictions about the 2006 and 2007 vintages “speculation” because most have quite a bit of capital yet to invest. It depends on how the economy fares, he said. “You always have too much in good performing investments and not enough exposure to bad performing investments,” Fewel quipped.

He added: “We have considerable exposure to those years (2006 and 2007), but ask me again in the next couple, three years.” Meanwhile, institutional investors chased returns, increasing their allocations to private equity, industry insiders said. At the same time, prices for LBOs got higher in the second half of 2006 and into 2007.

Allocations by both the largest public and corporate defined benefit funds topped 5 per cent, as of September 30, 2007. Corporate DB plans had just edged up to 5.3 per cent of total assets from 5.1 per cent two years previously, but the largest public DB plans jumped to 5.2 per cent from 3.9 per cent during the same period, according to data collected in Pensions & Investments’ annual survey of the 200 largest US employee benefit plans. In total, the largest 200 retirement plans had US$285.5 billion invested in private equity as of September 30, 2007, of which buyouts comprised US$108.4 billion.

The largest endowments, those with more than $1 billion in assets, increased their average private equity allocation to 7.1 per cent in fiscal year 2007 from 5.7 per cent in fiscal year 2006, according to the 2007 and 2006 surveys done by National Association of College and University Business Officers, Washington.

Some of these investors may be struggling with low private equity performance over the next several years. “Limited partners that overcommitted to the 2006-2007 vintage years and to large funds during this period — for instance those who dramatically increased commitments to 2006-2007 vintages and had a 65 per cent to 75 per cent allocation to large and megabuyout funds — may have to work through a period of poor portfolio performance over the next several years,” Brem said.

But they won’t suffer alone. General partners committed a greater portion of their own capital to funds raised during the period. Industry insiders say that brand-name managers increased their commitments to their funds to as high as 5 per cent from 1 per cent between the later part of 2006 and into 2007. However, managers, such as KKR, have lowered their overall risk by selling stakes in their firms to sovereign wealth funds, institutional investors and the private and public equity markets.