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Are Private Equity Investing Pensions Suffering from Stockholm Syndrome?

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A number of public pension investors clamor for greater transparency but silently hesitate on pulling the trigger for U.S. state-regulated private equity laws. Are these accelerated portfolio monitoring fees a really big deal in the scheme of things?

mastersoftheuniverse_PE

For over two years, the U.S. Securities and Exchange Commission (SEC) with greater power and authority under the Dodd-Frank act, warned to the public that private equity buyout funds could be deceiving investors on undisclosed fees and questionable service provider arrangements. The SEC has invested in internal resources and has pursued the big names within the private equity world: KKR, the Blackstone Group, Apollo Global Management and now Wilbur Ross’ private equity firm. Each of these PE firms have agreed to pay fines.

Sample of Private Equity Firms Investigated by SEC Over Fee Disclosure

Date Defendant Firm Violations Disgorgement – USD Previously Refunded / Distribute Back to Clients – USD Interest – USD Penalty – USD Total Cost – USD
June 29, 2015 Kohlberg Kravis Roberts & Co. (KKR) Violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7. 14,000,000 3,260,000 4,500,000 10,000,000 31,760,000
October 7, 2015 The Blackstone Group SEC’s order finding that it breached its fiduciary duty to the funds, failed to properly disclose information to the funds’ investors, and failed to adopt and implement reasonably designed policies and procedures. 26,200,000   2,600,000 10,000,000 38,800,000
August 23, 2016 Apollo Global Management, LLC Violated Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8. Failed to reasonably to supervise the then-partner pursuant to Section 203(e)(6) of the Advisers Act. 37,527,000 28,800,000 2,727,552 12,500,000 81,554,552
August 25, 2016 WL Ross & Co.          

 
Source: SEC Data

It’s simple – top-quartile private equity firms could simply choose to do business in other jurisdictions, states and even countries.

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SWFI First Read, May 25, 2018

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MedInvestGroup Pushes Investment into Russian High-Tech Oncology Centers

The Russian Direct Investment Fund (RDIF) and Mubadala Investment Company have attracted MedInvestGroup, which manages a network of the PET Technology regional oncology and radiological centers, as a strategic investor in the joint management and development of a network of cancer diagnosis and treatment centers. The deal aims to significantly improve the efficiency of the already functional centers in Podolsk and Balashikha. The corresponding agreement was announced today at the St. Petersburg International Economic Forum.

Southern Satellite City and RDIF Reach a Financing Agreement

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French Industrial Giants Find Opportunity with RDIF

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A number of French industrial companies continue to invest within Russia, finding opportunities within the mega country. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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CPPIB Targets 33% in Emerging Markets by 2025

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The Canada Pension Plan Investment Board (CPPIB) generated a net return after expenses and pension contributions of 11.6% for the fiscal year ended March 31, 2018, versus its reference portfolio of 9.8%. For the reported fiscal year, CPPIB grew its net assets to a new high of C$ 356.1 billion (US$ 277.2 billion), compared to C$ 316.7 from the year previous.

Mark Machin, President and Chief Executive Officer at CPPIB, attributed the performance to the rising tide in public equity markets across most geographies, whose volatility in recent months was buoyed by significant fourth quarter earnings in the fund’s private holdings. Public and private equities, CPPIB’s first and third largest asset classes by exposure at 38.8% and 20.3%, saw estimated returns of 11.4% and 16.1%, respectively. Machin joined CPPIB in 2012 and was moved to the top in June 2016, following the departure of Mark Wiseman. Machin has a knack for the Asian region, being CPPIB’s first president for Asia and also spent nearly 20 years in Asia, working at Goldman Sachs. CPPIB plans to continue heavily investing in the APAC region, along with India.

Emerging Markets

“By 2025, we will invest up to a third of the Fund in emerging markets, which by that time are anticipated to account for 47% of global GDP,” said Machin in his section of the annual report outlining the pension’s updated strategic plan. CPPIB currently has C$ 56.1 billion invested in emerging markets, C$ 22.4 billion of which is wrapped up in China.

Foreign and emerging markets continued to dominate in CPPIB’s private equity investments with returns of 16.0% and 19.5%, compared to 1.8% for their Canadian counterparts. Asia was a standout market for the pensioner, which raised its exposure to private equity deals in the region by nearly 28% from C$ 13.4 billion to 17.1 billion, closed six direct investments worth C$ 1.6 billion, committed C$ 1.7 billion towards eight funds, and completed three secondary transactions for C$ 400 million.

With 275 global transactions completed over the fiscal year, CPPIB’s geographic exposure places 15.1% of its assets at home in Canada, 37.9% in the neighboring United States, 13.2% in continental Europe, 5.6% in the United Kingdom, 3.1% in Australia, and a whopping 20.4% in Asia.

Public Equities

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