Large Private Equity firms have been outperformed by their smaller competitors in the recent past, as revealed by the Wall Street Journal, in a report that features a public employee pension fund complaining over returns from investments made with the big players.
According to a report by the Pension Consulting Alliance, which is set to be presented today to the California State Teachers’ Retirement System, or Calstrs, the returns from the large buy-out funds are lagging behind their smaller competitors, with less than $300 million of Assets Under Management (AUM).
We criticized his opinion, as he was advising on investment through other alternative vehicles. He believes that the firms can get higher returns from private equity firms. Nonetheless, the latest statistics bring a twist of events, as it has been revealed the problem is with the large buyout funds.
A good example of this can be seen in our previous report on Carlyle Group LP (NASDAQ:CG), which indeed is one of the largest private equity firms. Carlyle Group LP (NASDAQ:CG) has more than $156 billion (AUM), and reported a loss, for its Q2 results.
On the other hand, Kohlberg Kravis Roberts & Co. (NYSE:KKR)’s profits increased to $546.1 million from the $315 million during the same period last year. Kohlberg Kravis Roberts & Co. (NYSE:KKR) has $7.8 billion (AUM), would be categorised under the large PE firms, going by the report published on Wall Street Journal that classifys funds with more than $3.5 billion AUM as large PE firms. However, it is far smaller than Carlyle Group LP (NASDAQ:CG).
Another large private equity firm is Apollo Global Management (NYSE:APO), which manages approximately $105 billion AUM, as of June 30th 2012. Its economic net income for Q2 stood at $42 million, after declining from $125 million for the same period in 2011.
According to research, the lackluster performance recorded by large equity firms as compared to their smaller competitors is nothing new, or something to be surprised of; this is rather an obvious scenario as the smaller firms can invest in more securities compared to big funds, which can diversify their investments more. Consequently, smaller funds would provide a high risk to investments, as compared to the larger funds.
The WSJ states, “funds launched in 2006 that manage $3.5 billion or more are up 4.1%, compared with gains of 14.1% for funds managing less than $300 million, and a 9.7% gain for those managing $1 billion to $3.5 billion, according to consulting firm Cambridge Associates.”
Another pension fund that finds itself in tango with the large fund drawbacks, is State of Wisconsin Investment Board. The board had invested in KKR, CG, and BX, and is now pulling off some of its investments in the companies; about $1 billion of commitments to KKR, Carlyle Group LP (NASDAQ:CG), The Blackstone Group L.P. (NYSE:BX), and other large firms, noted the report.
Calstrs on the other hand, revealed that the pension’s largest buyout investments are with The Blackstone Group L.P. (NYSE:BX) and TPG Capital, totaling $2.8 billion and $2.2 billion, respectively. Another teacher pension scheme involved in the outcry was The Teachers Retirement System of Texas, which also revealed that it had committed about $3 billion each to KKR and Apollo Global Management (NYSE:APO) last November.