PE Panorama: Should public institutions invest more in private equity?
A recent Financial Times article highlights a private equity debate that’s well worth having. The opinion piece, billed as a “case for addressing private equity prejudice”, challenges the decision by Norway’s finance ministry to deny a request by the US$1.6 trillion Government Pension Fund Global (GPFG) for permission to invest in private markets. It argues that public markets don’t provide enough diversification in today’s climate.
It quotes a speech by Marc Rowan, CEO of Apollo Global Management, at a conference hosted by the GPFG’s head. Naturally, Rowan talked his own game very well. Look, however, at his firm’s pedigree. Recall that co-founder Leon Black stepped down in 2021 following a report on his dealings with disgraced financier and sex offender Jeffrey Epstein, who according to Black, saved him $1.3 billion in tax liabilities. Black’s net worth is estimated at around $14.3 billion.
Set aside the fact that an institution like GPFG could potentially suffer reputational damage by association with controversial general partners. Black himself is an instance of some of private equity’s most outstanding failings: a culture of entitlement and unaccountability, and a compensation structure masquerading as an asset class which guarantees that an outsize share of commitments and returns end up in the pockets of GPs. Pension funds might well ask why they should pay to enrich someone like Black so much.
Meanwhile, Apollo is embroiled in a potentially very toxic legal case in the US involving investment into a firm that allegedly reaped rewards by taking out life insurance on strangers. Bloomberg’s reporting on the allegations includes such lines as “illegal life insurance policies” and “a web of sham trusts”. Is that really the kind of entity that a scrupulous public investor like GPFG can justify committing to?
I would never argue that there is no case for investing in private equity. I would absolutely argue that such investing should be done prudently, cautiously and transparently. Any institution committing to the asset class should watch its performance like a hawk, insist on regular detailed reports from the GP, and demand returns that justify fees and costs. If it can obtain lower management fees on its commitments than the 2% standard, it should. And it should cap its allocation at some 10% of assets.
Current compensation of GPs may or may not be justifiable; they certainly aren’t justified to keep choice of investment targets, performance details, fees charged, etc., away from their investors, especially with arguments that monitoring is tricky and costly, or that their value-enhancement secret sauce is proprietary and not for outsiders, and such.
Public scrutiny of publicly traded assets may add costs, but it might avoid potential scandals like the one currently brewing at Apollo.