USS has an in-house private markets expert to oversee the deal, but where funds lack such expertise or commitment to an illiquid asset there can be disappointment, according to Serkan Bahceci, European head of infrastructure research at JP Morgan Asset Management. “A successful collaboration means the investors should contribute something to the governance of that entity. That requires a lot of expertise for the local economy or for the sector,” he says. “People believe wrongly that these assets manage themselves, they clearly do not. You need an active board looking over the shoulder of the executives. If the internal managers do not have time to attend the board meetings, then the collaboration gets weak.”
For this reason, Bahceci sees some of the best scope for success in funds that invest in domestic assets. The Royal County of Berkshire Pension Fund recently acquired a 20% stake in asset manager Gresham House as the cornerstone investor in the manager’s alternative investments platform. Berkshire said the deal offered the ability to access long-term illiquid asset classes in local social and infrastructure investment initiatives, such as housing, while affording it co-investment rights and greater transparency.
Another fund manager that has given some thought to what makes a successful co-investment is Paamco. Andrew Ross, an associate director at the firm, urges investors not to rush into a deal. “This can often happen when an investor is given the sense that they will miss out if they do not act quickly.” To counter this, he says, such deals should have an independent assessment before proceeding.
Aviva Investors believes it has overcome such concerns on governance by hiring someone who used to sit on the buy-side of such deals. Mark Versey, a former chief investment officer of an insurance fund, runs Aviva Investors’ illiquid assets operation. He says because each deal he strikes always contains some money from parent company Aviva’s insurance funds, he is fully aligned.
“To be principal on transactions and agents, we are uniquely aligned in interest with our clients,” he says. “As the ex-CIO of an insurance company, when you are looking at investing in illiquid assets, the hardest thing of all is to work out whether the fund manager is actually incentivised in the correct way to think about your own institutional piece.”
Versey says the smallest ‘co-investments’ on a deal for a private asset such as debt or infrastructure finance is £10m.
REASONS NOT TO DEAL
Size constraints, diversification concerns, liquidity constraints for defined benefit funds and a lack of familiarity with a manager are other reasons for not doing a deal. Alan Pickering, a director at BESTrustees, echoes such reticence.
“My clients would rather go in at arm’s length than with a shared developer, due to lack of familiarity and lack of liquidity – the potential delay in finding someone to take my half.”
Possibly, there is a misnomer about what constitutes a co-investment and what does not. David Weeks, co-chairman of the Association of Member-Nominated Trustees, says he is not aware of any fellow trustees who are gearing up for co-investing. His impression, he adds, is that only the larger schemes such as USS and Railpen have the governance to do this.
