Dwight Cass
04/01/2004
As Worth went to press, the investment staff at the $165-billion California Public Employees’ Retirement System, one of the world’s largest and canniest institutional investors, was preparing to announce that its private equity portfolio had just passed a remarkable milestone: $5 billion in profits since its inception in 1990. CalPERS’s investments, totaling over $19 billion, appear to rank among the private equity industry’s most successful, and its announcement came as a perfectly timed boon for the host of private equity firms now seeking funds.
Private equity firms often regale potential investors with
anecdotes like this. But none of us really compares with CalPERS in terms of
either financial resources or expertise. To keep our investment choices in
perspective, we need to understand if and how the success of institutions such
as CalPERS is relevant for individual investors like ourselves.It turns out not to be terribly germane. Few of us will denominate our private equity investments in billions of dollars. A 30-percent allocation is at the high end of prudent, financial advisors say, so even those with $1 billion in investable assets should still only invest about $300 million.
Because of our more modest resources, we must consider whether our investments will attract the attention we demand from our fund managers. Will they answer our questions in a timely manner? Are they willing to customize information briefings to suit our needs? Will the red carpet they roll out for the likes of CalPERS be tucked away when we visit?
It depends on the fund. In the late 1990s boom, many private
equity funds were leviathans, often measured in billions of dollars. A
$10-million to $20-million commitment could easily be lost in the rounding; the
investor providing it was seen as hardly worth the trouble.
But the
three-year bout of fund-raising and investing turbulence that followed brought
many private equity firms down to earth. Today they promise to keep their funds
smaller and more responsive. They have learned that it is important to keep
investors happy; it is also extremely difficult to invest a megafund’s capital
profitably. The best private equity firms, after all, invest as much
entrepreneurial capital as they do money, and a venture capitalist can sit on
just so many corporate boards.
But this trend toward smaller funds has its
downside: It may become increasingly difficult to get access to the best fund
managers, especially as institutions put more and more capital into private
equity. But when we do get access—whether on our own or through funds of
funds—we should have a greater chance of securing some of those remarkable
profits for ourselves.
Dwight Cass
Editor-in-Chief