The TEXPERS Blog

Callen survey examines institutional private equity programs

By Jay Nayak

Guest Columnist

A recent survey found that an array of governance, oversight, staffing, and other administration issues affect how institutional private equity portfolios are constructed, monitored, and managed.

Investment consulting firm Callan conducted a survey of institutional private equity investors to identify considerations and practices that impact how the limited partner community accesses and implements private equity investment programs. The firm focused on implementation approaches (e.g., internal staff, non-discretionary consultant, etc.), patterns of investment and commitment activities over time, governance and oversight, staffing, and resource considerations, and the resulting effects for private equity program administration functions. Callan's 2017 Private Equity Survey included 69 institutional investors with $1.2 trillion of total plan assets and $103.3 billion in private equity assets, spread across 540 unique general partners and 2,715 unique partnership investments.

At a broad level, the survey found governance, oversight, staffing, and other administration issues often led to less than ideal implementation approaches, often including sub-optimal use of the discretionary consultant/fund-of-funds model for private equity programs that have matured, or that have significant scale.

Other highlights from the survey:

• Investors’ private equity programs were similarly constructed, with a heavy emphasis on a narrow universe of private equity sponsors. Survey respondents collectively invested with a small cadre of 540 private equity sponsors, with the top 50 firms managing approximately 41 percent of reported private equity assets. Further reflecting this concentration, 197 firms were reported to manage only one commitment across all Survey respondents.

• Toward the later stages of market cycles, investors tend to significantly broaden their relationships with existing private equity sponsors. Commitment rates to existing general partners greatly widened in peaking markets, driven by investors’ active investment in new strategies or geographically focused offerings.  In 2016, 82 percent of private equity commitments reported were with existing general partners, the highest follow-on commitment rate across all years analyzed. Alternatively, many investors actively upgraded private equity sponsor relationships in trough periods.

• Governance procedures and oversight body involvement directly affect how investors implemented their private equity programs. Private equity programs administered by internal staff reported wide latitude to make operational, strategic, and implementation decisions. Investors using non-discretionary consultants reported moderate flexibility to manage their private equity teams and programs, while discretionary consultants/fund-of-funds were primarily used for plans where approvals from oversight bodies were widely required across an array of operational, strategic, and implementation decisions.

• Staffing was a widespread source of frustration. Challenges primarily stemmed from limited personnel resources and challenges in hiring and retaining experienced staff. In a parallel study, Callan found private equity staffing was top-heavy, with 63 percent of reported staff qualifying as senior-level, relative to 25 percent for comparable private equity consulting firms and fund-of-funds. Further, the firm found a segment of large plans disproportionately understaffed, with the portfolio oversight responsibilities nearly double that of other institutional private equity investors. Finally, Callan found that ambiguity around the path of career progression and compensation growth drove elevated turnover levels; there was nearly an 81 percent turnover rate between junior-level to mid-level private equity staff and a 23 percent turnover rate between mid-level and senior-level staff.

• In administering institutional private equity programs, investors valued core disciplines. These included strategic planning, structuring, and pacing; qualitative manager monitoring; performance reporting, benchmarking, and audit; and primary partnership due diligence. Many of these tasks were led by external consulting or other resources, while private equity staff, previously characterized as top-heavy, was often relegated to performing back office and administrative tasks.

The full survey is available on Callan’s website here.

The views expressed in the article do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Callan or TEXPERS.

About the Authors:

Jay Nayak

Jay Nayak is a senior vice president in Callan's Private Equity Research group, based in the firm's San Francisco office. His role includes research coverage of private equity strategies and private credit on behalf of the firm's clients. This due diligence process includes a review of investment strategies, organizational structures, investment processes, track records and other firm-,, investment vehicle-, or asset class-specific considerations. Nayak is also responsible for performing research on private market investments for internal and external distribution.