Equity markets reached rock bottom in early March 2009, with the S&P 500 falling under 700 before embarking on a steep bull run that only really lost momentum last October. 

In the period before the market hit its low, in April 2009, I moderated the institutional investor panel at the Milken Global Conference in Los Angeles, quizzing such industry luminaries as Chris Ailman, long serving CIO of CalSTRS and the late Joe Dear, who had just been appointed as CIO of CalPERS. 

“CalPERS and others have continued to lead a charge against market practices in private equity”

The topic of illiquidity dominated the panel. Illiquid positions in private equity were seen as regrettable as some investors were forced to sell assets to meet capital calls. And private equity came under fire subsequently as investors railed against perceived high fees and opacity, even as many negotiated good terms with general partners post crisis or picked up favourably priced secondaries.

CalPERS and others have continued to lead a charge against market practices in private equity in a bid to make general partners more institution-friendly. 

Many European pension funds also profess to dislike the standard 2-and-20 fee and carried interest terms of private equity, yet general partners still predominately have the upper hand. Global fund raising remains strong. Illiquid investments are once again the flavour of the month and private equity firms themselves have expanded into areas like private debt. 

At this February’s SuperReturn in Berlin, private equity’s annual jamboree, leading private equity figures were bullish to the point of complacency. Platform speakers were keen to underline the ability of private equity to deliver added value through the economic cycle – if I understood the message correctly – precisely because of the superiority of the private equity industry itself. 

Fundamentally, interest in illiquid, private markets investments has coincided with a crisis of confidence in active equity managers to deliver value over index benchmarks. As the number of listed companies has declined in recent years and IPO activity has levelled off, investors realise that a significant investment opportunity set exists in the privately held sphere.

As Michael Arougheti, co-founder of Los Angeles-based Ares, pointed out at SuperReturn: “The structure of public equity markets does not reward long-term shareholders.” And as the decade-long bull market stalls and switches to reverse gear, there seems little likelihood that investors will stop priming the private equity capital pumps. Private equity titans have a lot to deliver but if they do deliver, it will be on their terms.

Liam Kennedy, Editor