Comments from around Europe suggest that while the long-term growth of the sector is not in much doubt, pension fund consultants are still having a hard time getting clients to invest.
“At the moment, my clients do not want to invest in private equity,” says Ruud Kleynen, managing director, Kleynen Consultants in the Netherlands. “People are looking for investment alternatives, and they want to get a better return for the same risk. They are interested in how private equity works, and I give them information, but they do not want to invest. At some point they may take the plunge, but not now. They lost a lot of money in 2002 and don’t want to risk a decreasing return by going into private equity.”
“I’m not extremely bullish about the sector at the moment – there’s more interest from clients in real estate or hedge funds,” says Jan Bernhard Waage, managing director, Wassum Investment Consulting in Sweden.
But where his clients are considering investing in private equity, Waage tells them to invest at least 5% of their portfolio in the asset class.
“It’s not going to affect total performance if there’s less than 5%,” he says. “But that size of investment would still take up too much of the client’s time in terms of monitoring, and time costs money.”
Waage has told clients they should be getting about 3-5% over publicly-quoted equities as an illiquidity premium. But he says that private equity investors have not been getting that over the past few years.
Many of Waage’s clients use funds of funds, or secondary funds, to approach the private equity market.
“Our clients’ investments are very diversified, but their portfolios haven’t been focused on the Nordic area,” he says. “In fact on the buyout side they are more diversified than normal equity portfolios, using buyout funds in Europe and the US. With other private equity funds they invest on a global basis. However, biotech funds – which were in favour five years ago – are not so popular now.”
Although venture is generally shunned in Sweden as elsewhere because of previous bad experiences, Waage says that the larger pension funds have their own reasons for avoiding it.
“These clients believe that it is difficult to create a proper exposure to the venture market because individual venture companies are so small,” he says. “So they think it is easier to get exposure through buyouts, mezzanine and secondary funds.”

One of the most basic pieces of advice which many pension consultants give to clients considering private equity investment is the obvious: go to a specialist in the field.
Frits Bosch, director of the Dutch consultants Bureau Bosch, says: “We’re not specialists, and things are getting so complex. So I would recommend a pension fund to approach one of the asset managers, such as Invesco, which are respected in this area.”
However, he is careful not to push the asset class very hard. “We have recently had clients asking about private equity, but we are still a bit hesitant, because there was a time when private equity was not such a good investment,” he says. “And pension funds have long memories.”
Bosch does however suggest private equity to clients who are looking for an asset class which has a relatively local emphasis.
He says: “Furthermore, private equity has a different cycle to other asset classes. Another factor in its favour is that we are currently in the process of redesigning clients’ portfolios to comply with the new financial framework and fair value reporting, which means you look for a higher alpha class. Private equity would come into that category.”
Where clients do invest in private equity, Bosch advises them to use funds of funds. He says: “It has to be this type of proposition in order to be more diversified and decrease the risk level. I would look for a supplier with a long track record in private equity, mostly the larger houses who have interesting deals.”
Bosch’s clients invest mostly outside the Netherlands, mainly in Europe and the US.
“The private equity element should be up to 5% of the portfolio, but not much more,” he says. “In terms of yield, investors can get 15 to 20%, compared with average dividends of 3.5% on Dutch equities.”

For the future, Bosch says he is bullish about private equity. “In the Netherlands, pension funds such as ABP and PGGM are doing a me-too job for the others. However, it will be a while before the rest of the pack invests.”
“Small amounts of private equity in a portfolio make sense,” says Ernst Ratzer, managing director, Swiss-based Aon Chuard Consulting. “I would suggest between 5% and 10% of the whole portfolio, or 20-25% of the equity portion.”
Ratzer tells his clients to look for a return of between 2% and 4% over normal equity market returns.
“Of course, we know it’s a higher risk and you must expect a higher return, otherwise it makes no sense,” he says. “They are tied in for long periods, with not much liquidity. But we do not give our clients expectations which are too high.”
Aon Chuard is another consultant that advises clients to use a specialist. Generally, clients are advised to use funds of funds, rather than invest directly.
“We tell clients they should look for vintage diversification, such as venture and buyout, and also diversify geographically,” says Ratzer. “Good funds are diversified, but for good diversification you need a big region such as Europe or the US.”
“My advice at the moment would be to keep private equity at a neutral position,” says Graziano Lusenti, managing partner, Lusenti Partners, which is also based in Switzerland. “This depends on what kind of strategic asset allocation the client has given to the asset class, but would probably be between 2% and 5% of the portfolio. Depending what their focus is, the right solution would probably be a fund of funds.”
Luisenti, who sees himself as a generalist, says he would turn to a seasoned specialist for the selection.
“There are two approaches to geographical diversification,” he says. “Some pension funds go for companies investing in Switzerland because they feel it’s right to do something for the domestic economy. The other view is to invest globally. This geographical selection is more important than deciding which industries they want to invest in.”
However, Lusenti says that the argument for or against private equity depends what other assets a pension fund has in its portfolio.
“If they are overweight in biotech or IT, there is less of a need to invest in private equity,” he says. “It also depends what risk appetite the pension fund has.”
Lusenti tells his clients that average expected returns should be in the region of 7-9%.
But he says, “We have to make sure they understand the dangers of private equity. Overall, the key is liquidity, especially as many Swiss pension funds have had many bad experiences over the past 10 years. If they do not have the technical know-how, and if the financial equilibrium is not good, I would recommend them not to invest.”