Private equity and private infrastructure manager Hermes GPE wants to make all aspects of the asset classes accessible to clients - at least those willing to take it seriously, CEO Alan MacKay tells Raquel Pichardo-Allison
“Do they put more into alternatives? That’s an interesting question. At the moment, pension funds are asking the question, ‘do we have a little too much in bonds, or public equities?’ Though they’re asking this question, it’s not yet translating into increased allocation to alternatives. They’re at a point of reflection, a point of decision-making,” said MacKay.
However, data shows a shift to action is on the horizon. According to data released by Coller Capital in January, over 80% of global institutional investors plan to add new private equity managers to their rosters in the next two-to-three years while 34% of investors are looking to increase their target allocations to private equity in 2011.
Meanwhile, the Coller survey found pension fund managers felt a lack of resources could prevent them from fully taking advantage of the asset class. Half of the corporate and public pension funds interviewed said they could improve their returns if they had more investment staff.
“It could be that some play a very safe game of being defensive, and maybe there are others whose trustees choose to look at higher returns. It’s the pension funds that decide they’re really going to pursue alpha to close their liability gaps...those are the ones that will be increasing their allocation to alternatives,” said MacKay.
MacKay said Hermes is targeting those pension funds looking to add value from the asset class.
“There’s no point in using us or any other asset manager unless you really want to use the private equity asset class. If you want to have a little bit of private equity, you can probably buy some brand name like KKR or Blackstone without any expense of complicated manager resources. You can buy off-the-shelf private equity. But if you really want to find the best managers or a relevant manager to your risk profile, then you turn to us,” he said.
Co-investment
One approach Hermes is promoting among its clients is a greater use of co-investment opportunities. Traditionally, clients have invested between zero and 20% in co-investment opportunities, where the pension funds take a direct ownership stake in a company. He said all clients “can do slightly more”.
“We think pension funds who really want to use the asset class should look at it on a global basis and should balance their fund investing and co-investing so there’s at least 20% co-invested,” said MacKay.
Another specialist area Hermes sees potential is in agriculture, a very underdeveloped market, and infrastructure investing.
“These are really difficult areas to access as public entities. There is very limited public market access to agriculture and infrastructure. Agriculture is a great one; 90% of agriculture is owned by 30 million farmers privately around the globe. It’s wonderful for private equity.”
