Consortium to Launch $1B Program to Seed 6 PE Firms

Consultant says announcement from The Alaska Permanent Fund, UK Railways Pension Scheme, and The Wafra Group expected within next several days.

Aiming to reduce fees paid to private equity general partners, The Alaska Permanent Fund, the UK Railways Pension Scheme, and asset manager The Wafra Group are launching a joint $1 billion program to seed six new private equity firms, says Ashby Monk, a Stanford University professor who serves as a consultant to the group.

Monk, who says a formal announcement is expected in the next several days, made the disclosure during a meeting Wednesday of the Investment Committee of the $225.3 billion California State Teachers’ Retirement System (CalSTRS) in West Sacramento.

Monk was one of the panelists discussing alternative private equity models, a hot topic for global institutional investors as asset owners have become increasingly concerned over the high fees charged by PE general partners.

“With a billion dollars, they are going to put, in a single year, six new general partners in business,” Monk said of the new consortium.

But Monk, the executive director of the Stanford Global Projects Center, said despite the expected huge cost savings in fees, getting final approval from all three organizations’ boards has been a challenge.

“From the outside looking in, I say, ‘Oh my gosh, a seeding platform backed by these huge pools of capital, they’re going to able to negotiate incredible fee structures, and they are pulling name-brand individuals out of name-brand general partners, and getting aligned structures,’ and yet when it comes to the board, it’s hard,” he said.

Monk said he has been encouraging investment staff at the three organizations to get the project “across the finish line.”

Calls to Russell Read, chief investment officer of the $65 billion Alaska Permanent Fund, were not returned.

Officials of the $38.9 billion(USD) UK Railways Pension Scheme and the Wafra Group, which is owned by the Public Institution for Social Security in Kuwait, were not immediately available for comment.

Wafra Partners, a subsidiary of Wafra Group, makes direct investments in portfolio companies as a private equity general partner, its website says.

Tuesday’s panel was part of a yearlong examination by the CalSTRS Investment Committee of alternative ways to run the system’s $17.2 billion private equity portfolio.

CalSTRS’ private equity portfolio is almost exclusively made up of funds run by general investment partners.

An alternative to that model was presented Wednesday by Mark Wiseman, the former CEO and president of the Canadian Pension Board Investment Board.  The plan is known for its direct private equity investment program, buying portfolio company without a general partner.

Such a program can save the 1% to 2% management fee pension plans pay to private equity firms and the 20% split of profits.

But Wiseman, now the global head of active equities at money manager BlackRock, said such programs require staff with deep investment experience who can command multi-million-dollar salaries.

That has not sit well with members of the CalSTRS board, who have said the public would not tolerate such compensation.

Wiseman said he had a rule at the Canadian Pension board that no investment staffer should make more than a defenseman on the Toronto Maple Leafs.

“That sounds crazy, but if people could get their head around the fact that you can pay $2 million or $3 million for a person to skate around with a stick,” he said, “you can get probably your head around that you can pay [investment staff] $2 million or $3 million to invest your pension.”

Monk said the only way for CalSTRS to reduce the fees it pays to private market investments is to find alternatives to traditional models of investing.

He said private investments are needed because pubic markets won’t likely deliver the performance needed. “But there is a flood of capital moving into private markets right now, you are not the only organization to realize that illiquidity, and alternative risk premia—offer a useful way to boosting returns that are not available on pubic markets.”

Monk said private equity fees are not fully transparent and it’s easy to be “gamed” by private equity managers.

“We have enriched Wall Street to an extent that is astounding,” he said.

Monk said the “easiest path” to becoming a billionaire in America is not to start a technology company but an asset management company.

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