A longer-term approach to private equity

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A road sign with short term long term words on sky background © Liu Ming / 123RF Stock PhotosBlackRock Inc. is shaking up the private equity industry with a new longer-term approach to the asset class.

In April, the firm announced it was ready to start investing its long-term private capital vehicle, which had $2.75 billion in capital committed from cornerstone investors at the time.

According to BlackRock, the permanent capital vehicle will potentially be more rewarding than public equity and less risky than highly-leverage buyouts. “What makes LTPC innovative in meeting our clients’ needs is its perpetual structure and active ownership model that is designed to create value, limit re-investment risk and operate with lower volatility compared with existing private equity market constructs,” said Mark Wiseman, chairman of BlackRock Alternative Investors, in a press release.

Christopher Ailman, the chief investment officer of the California State Teachers’ Retirement System, which has about nine per cent of its portfolio allocated to private equity, highlights the longer-term focus of the new strategy. “Even though private equity has a seven-year, on average, life holding period, that’s still too short term if you’re a pension plan with 30 plus-year liabilities, so I like the fact that it’s long-term focused.”

Janet Rabovsky, partner at Ellement, says this type of vehicle makes sense since, if an investment is holding a good operating company, it may not make sense to sell. And Kevin Little, an investment consultant at Eckler, agrees, noting more companies from buyout funds are being sold to other buyout funds. “Why would another buyout fund be wanting to buy this company? . . . They’re obviously buying it because there’s extra value to be extracted from it.”

A longer-term private equity fund can also be attractive because it can help decrease the administrative burden associated with private equity, notes Little, since plan sponsors won’t need to find a new fund every few years and complete the due diligence and work associated with that. It can also make private equity allocations easier to maintain.

“In terms of maintaining — say you have a five or 10 per cent allocation to private equity —that’s going to be good for maybe your first six months or a year or something, and then things are going to change and your allocations [could drift away from target].”

While the long-term nature can help reduce the administrative burden, it’s also important for plans to consider this is a long-term commitment. As such, plans must be comfortable knowing that they can’t get their money out right away, says Little.

Pension funds considering longer-term allocations should take into consideration what they’re hoping to achieve, their timelines and to do research on the options available, says Rabovsky, highlighting the availability of some other offerings similar to BlackRock’s new vehicle.

Overall, the change in the industry is a positive one, she notes. “I’m happy to see that people are stepping back and saying, ‘OK, is this the best way — the right way — to invest the money?’

“I think markets should evolve. I don’t think simply because something has worked and been successful in the past, . . . that we can’t consider new ways . . . whether it be structures or investment approaches, whatever, because people’s needs evolve, markets evolve, risk appetites evolve and so, any time there’s a little bit of an evolution, it’s exciting. It’s interesting because it’s another tool in our toolbox.”

BlackRock’s new approach is connected to two Canadian pension industry leaders. Wiseman is the former president and chief executive officer of the Canada Pension Plan Investment Board. And André Bourbonnais, a managing director and the global head of BlackRock Long Term Private Capital, was previously chief executive officer and chief investment officer at the Public Sector Pension Investment Board.

UPDATED: July 18, 2019 at 11:21 a.m.

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