VFMC was not among the redeemers from these large, sophisticated, “US east coast” hedge funds, whose strategies range across credit and equities, Arter said. Rather, it saw an opportunity to lift its stakes with these managers as new capacity opened up. This earned the VFMC itself “some kudos” with the big hedge fund shops in the process. “We tend to try and partner and make a substantial investment with managers, so we’re not a tiny part their fund. We’re material,” Arter said. VFMC’s current private equity portfolio was about three years into an expected seven-year lifetime, Arter said, meaning that its recent outperformance was not attributable to any “harvesting” of investments. The program does not extend to emerging markets, where the operational conditions required for private equity investing are not as mature as in developed markets, Arter says.
“Private equity depends on real transparency, on books and records, on the rule of law. It’s a real deep dive. It’s seven years.” He acknowledged the difficulty of consistently measuring the unlisted portfolio’s performance against its listed benchmark – the listed market moves ahead of the private market, providing a mismatch in returns which makes comparisons difficult – but questioned whether private equity indexes, such as those run by State Street, are mature enough to be used by large institutional investors. The current VFMC team became established last year with the appointment of Arter, following a turbulent period in which former CEO Syd Bone and investments chief Leo de Bever walked at different stages of the financial crisis. The team was “acutely aware” that their headline three- and five-year performance falls below benchmark, even though many of them, including CIO Justin Pascoe, were not at VFMC at the outset of these periods.