BT scheme doubles private equity exposure

The £1bn will be invested globally over three years, split evenly between funds and co-investments.

The fund had invested a similar amount in private equity with Hermes GPE in 2011, and by 2014 its private equity portfolio represented 3.2% of its assets.

Having been one of the first private equity specialists to adopt the co-investment approach, in 2010, 50% of Hermes' private equity assets are now managed in this way.

This is attractive for investors according to Hermes GPE head of private equity Peter Gale because, unlike property, bond, and equity portfolios where investors can control exposures, private equity portfolios involve "blind pots".

A certain amount of money is committed and then drawn and distributed at the discretion of the manager.

Gale, who ran Natwest's pension scheme for a decade up until 2003, believes that having control over the fund structure is "absolutely critical" for investors, and that this can be achieved by co-investing.

He said: "By doing that we've put ourselves in a position to have control over our private equity exposure. Control really matters, particularly at a time when valuations are very full in the quoted world."

In this structure Hermes acts as the central co-investment manager while using its relationships with funds globally to provide a steady flow of deals.

He predicts this will develop into a wider trend across the industry: "Private equity has been very much a cottage industry for a long time despite having grown in scale. The fund and fee structures are exactly the same as they were 25 years ago when the industry was a fraction of the size it is now; it hasn't evolved.

"But we sense the limited partner [investor] base is now ready to push the industry to evolve into its next reiteration. Part of that will be getting greater control over how and when they get exposure which you can't get in pooled structures."

Private equity has come under scrutiny for lack of transparency of fee structures with large US pension plans discovering headline fees are just a fraction of total fees.

On top of headline fees, there are also monitoring fees, directors' fees, and carried interest, which can materially affect performance outcome.

Gale said this makes it difficult for schemes to assess value for money: "It's a trustee by trustee judgement - obviously alpha is important and some are prepared to pay more for it than others. But what's absolutely clear is that there needs to be more transparency."

He believes part of the solution is bypassing pooled funds by co-investing, but also moving away from the commitment fee structure which can be very expensive as it involves paying upfront fees for future activity.

Hermes is moving away from this model to charge instead on a net asset value basis.

"We are trying to minimise the fee leakage for BT and our other clients," he added.

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