Pension funds ‘falling short’ on private equity investment practice

Pension funds were “falling short” of best practice on their private equity investments, according to alternative investment solutions provider Efront.

Efront’s first LP Proficiency Survey found that half (50 per cent) of pension funds only use the simplest form of performance measurement for their private equity investments.

Furthermore, less than half (45 per cent) do not “attempt to seek better alignment” with private equity firms or separate accounts.

It also found that 48 per cent of schemes used the most basic form of monitoring, and in the process were "failing to leverage integrated systems” for analytics and transaction libraries.

Commenting on the report, Efront CEO, Tarek Chouman said: “There is no shortage of commentary about the value created by general partners of private equity funds. Much less consideration is given to the value added by the proficient and engaged limited partner.

“And yet such is the complexity of managing a portfolio of private equity funds, and such is the range of sophistication in how LPs approach this challenge, that the LP value creation dynamic ought to be a major consideration.”

Despite the shortcomings, the report also highlighted areas in which pension funds were performing well.

It revealed that more than 90 per cent of schemes were using sophisticated methods to measure performance and all pension fund respondents displayed a “high or medium level” of proficiency.

Additionally, 40 per cent were found to take a “rounded and comprehensive” approach to manager selection.

However this was the category with the highest answer dispersion in its responses, with 23 per cent of respondents being found to use the simplest and least comprehensive measures.

Chouman added: “You might think that respondents would be tempted to inflate their own sophistication, and it is possible that there is some confidence bias in the results. But the overall picture is endlessly revealing.

“The highest area of proficiency is in return measurement, while areas of relatively poor proficiency, such as liquidity targets, negotiating priorities, position management, benchmarking and information exchange leave the most room for improvement in performance.”

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