The Wall Street Journal broke a story that is guaranteed to rock the private equity industry. The giant Dutch pension fund PGGM, which manages over $200 billion in the form of the retirement assets of social workers and nurses, has said it will stop investing in private equity funds that refuse to make full disclosure of all fees and costs.
Despite being less than a household name in the US, PGGM is a large and influential private equity investor. Moreover, private equity standard-setter CEM Benchmaking not only singled out South Carolina for being far ahead of other US pension funds in its vigilance in identifying fees and costs, but also pointed out the other countries, such as the Netherlands, Denmark, and Switzerland, were mandating full disclosure. From an April CEM report:
In the Netherlands, the Federation of Dutch Pension Funds introduced new reporting standards in 2012 requiring Dutch pension funds to show full investment costs. These standards have been adopted by the Dutch central bank, De Nederlandsche Bank (DNB), with the expectation that all Dutch pension funds will comply with their 2014 financial statements. Specifically for PE, full investment costs include full management fees, performance fees, consulting fees, monitoring fees and transaction costs.
PGGM isn’t simply responding to these new requirements. It’s putting the entire private equity fee-gouging regime in its crosshairs, and demanding that fees bear a reasonable relationship to costs. Europeans, who don’t hold financial buccaneers in high esteem, do not regard private equity multi-million dollar pay packages as reasonable costs that they should have to support. As the Wall Street Journal reports:
“The interests of our beneficiaries and the interests of the asset management industry are not always aligned,” Ruulke Bagijn, PGGM’s chief investment officer for private markets, said in an interview. “We are on the side of pension funds and we no longer want to turn a blind eye on difficult subjects like fees and compensation.”…
PGGM will gradually introduce its new rules and will stop investing in funds that don’t disclose all fees by 2020, according to the document. It will also stop investing in funds whose fees are deemed to be “considerably higher than costs.” PGGM expects remuneration to be based mainly on the performance of managers’ funds, and it is monitoring how much of each manager’s own money is invested in their funds.
“Writing what we find acceptable and what we don’t find acceptable is new,” Ms. Bagijn said.
Mirabile dictu! A private equity investor that is not afraid to act like a normal important customer would, meaning haggle over costs when they look out of line.
PGGM is not happy about the disproportionately, as in unjustifiably high, cost of investing in private equity:
Most of the money that PGGM manages is on behalf of the PFZW pension fund. More than half of PFZW’s €811 million fee bill in 2014 went to private equity. Yet private equity only accounts for 5.6% of PFZW’s €162 billion of assets.
And PGGM is at the forefront of disintermediating high cost “alternative” investment managers:
To reduce its fee bill, PGGM stopped investing in infrastructure funds and started investing directly in infrastructure assets a few years ago. As a result, annual infrastructure fees have declined from more than 2% of assets to less than 1% and PGGM expects them to decline further. PFZW paid €36 million in infrastructure fees in 2014 and had €4.3 billion in the asset class last year.
In private equity, the pension fund has started to invest directly in takeovers, such as the €3.7 billion purchase of car leasing company LeasePlan Corporation NV in July. It is also backing the creation of new private-equity firms in exchange for better terms on fees. Last year, PGGM supported the spinout of Nordian Capital Partners, formerly the private equity unit of Rabobank. The fund is also committing larger amounts to some managers to gain more favorable terms.
“We are able to make progress because we are going more direct,” Ms. Bagijn said. “That is already resulting in lower costs for our clients and further cost reduction will be substantial going forward.”
As we’ve pointed out, private equity returns have been flagging despite the one-two benefits of the boost to risky assets and the considerable reduction in borrowing costs provided by QE and ZIRP. Private equity’s failure to shine under such favorable conditions shows that there are way too many funds chasing too few deals, and that the rich fees, only about 1/3 of which are performance based, are indeed eating into returns over time.
Moreover, PGGM’s willingness to take on the industry frontally shows how craven US public pension funds, particularly mega-PE investors like CalPERS and CalSTRS, are. The Sacramento behemoths seem willing to do their job as fiduciaries at best selectively. When caught out as captured by private equity, they press the industry only when the media piles on (and in the case of CalSTRS, not even then).
The tide is beginning to turn on private equity. It’s time for US public pension funds to recognize that if they don’t start playing the role of the sophisticated investors that they claim to be, their legitimacy will be questioned even more than that of their seeming private equity lords and masters.