Private Equity's Expanding Borders

A growing number of private equity firms are increasing their exposure to various emerging markets as well as diversifying the types of deals being struck, according to a recent report by the Washington, D.C.-based Emerging Markets Private Equity Association (EMPEA). The organization’s updated year-end data shows that fundraising for emerging markets private equity reached US$33.2 billion in capital commitments during 2006, a 29% increase over the $25.8 billion raised in 2005 — and roughly five times the $6.5 billion raised in 2004.

Emerging markets private equity returns have been improving over the last three years, and these funds have been outperforming U.S. private equity returns, the report indicates. EMPEA finds that private equity is crossing into markets with little or no history in private equity and reaping larger deals. The organization is seeing an “increased use of leverage, and the emergence of sector-focused and follow-on funds, and secondary sales” among private equity investors.

The region seeing the largest amount of capital in 2006 was emerging Asia, where 93 private equity funds raised $19.4 billion, a 26% increase compared with $15.5 billion in 2005, according to the updated EMPEA data. The report is available at empea.net.

DC Plans Warming to Socially Responsible Investing Trend

Socially responsible investing (SRI) is taking hold within defined contribution plans. Forty-one percent of sponsors who responded to a recent survey report they intend to add an SRI option to their DC plans in the next two to three years. Mercer Investment Consulting and Plan Sponsor magazine conducted the survey on behalf of the Social Investment Forum, a nonprofit membership association that promotes SRI. The survey finds that 19% of DC plans polled currently offer an SRI investment option.

A plan’s primary reason for adding SRI options is to offer funds that align with the plan sponsor’s mission, according to the survey. Roughly 72% of consultants and 46% of plan sponsors that responded to the survey see increasing or steady demand for SRI. Northern Trust was a research partner and co-sponsor of the survey, which polled 129 plan sponsors, 16 plan administrators and 38 consultants. Results of this survey will be available soon at northerntrust.com.

Online Learning Opportunities

Podcasts — online audio and video files — allow investors to learn about a variety of topics at their convenience. Northern Trust’s podcast library offers commentary and analysis on issues affecting institutional investing. A sample of topics currently covered includes:

• The Markets in Financial Instruments Directive
• The Five Myths of Transition Management
• The Global Pension Shift

Visitors to the library can subscribe to receive automatic updates whenever new podcasts are posted. To access the current catalog, go to northerntrust.com/podcasts.

Investors Seek Climate Change Disclosures

A coalition of 284 institutional investors that represents US$41 trillion in assets under management is asking 2,400 of the world’s largest companies to disclose investment-related company information concerning climate change. The coalition — known as the Carbon Disclosure Project — seeks standardized information on the business risks and opportunities that climate change presents to companies.

Specifically, the investor group is requesting data tied to company-wide global greenhouse gas emissions, steps taken to manage and reduce emissions, consumer sentiment, and the impacts to company operations from changing weather patterns and regulatory limits on emissions. The appeal marks the fifth such request by investors participating in the Carbon Disclosure Project, with the first request coming in 2002.

The Project’s registry of corporate greenhouse gas data can be found at cdproject.net.

Lifestyle, Target-Date Funds on the Rise as Default Options

U.S. defined contribution plan sponsors will use provisions under the Pension Protection Act of 2006 to choose more diversified default options, according to a new report from TowerGroup.

The report, “Big Bang Regulation for DC Plans: What the Pension Protection Act Means for Asset Management CTOs,” estimates that 56% of U.S. DC plans will offer lifestyle or target-date funds as the default investment options by 2008, up from 38% at the end of 2005, and 17% at year-end 2004. Its estimates are based on Deloitte Consulting’s most recent “Annual 401(k) Benchmarking Survey,” which polled 830 corporate plan sponsors on 2005 year-end data.

The percentage of U.S. plans using stable value or money market default investment options is expected to drop below 30% over the next two years, the report says. At that point, balanced funds and lifestyle or target-date funds will be the default option in at least 65% of U.S. DC plans. For more information, go to deloitte.com/us/annual401ksurvey.

Proposed Plan Structure Combines DB & DC Elements

A new proposed pension plan design seeks to address conceptual problems with defined benefit and defined contribution plans by merging elements of both plan types. The proposal — developed by Canadian academic Keith Ambachtsheer — is called “TOPS – The Optimal Pension System,” and it is organized around several broad themes ranging from political and governance issues to investment return benchmarking.

Ambachtsheer — a pension fund advisor and director of the University of Toronto’s Rotman International Centre for Pension Management — uses behavioral finance concepts and other economic principles to argue that neither DB nor DC plans will work over the long term. The primary problem with DB plans, according to Ambachtsheer, is that they attempt to share risk without spelling out to whom those risks fall. And DC plans erroneously operate under the assumption that plan participants will make rational, informed investment decisions.

TOPS plans would avoid potential pitfalls by automatically enrolling all workers, while optimal investment policies for individuals would be determined by age. The proposed plan would buy deferred life annuities as part of its automatic design to account for participants living longer than anticipated. Each TOPS plan would operate as a co-op, using internal pensions and investment experts to oversee outside investment providers and vendors. Learn more at rotman.utoronto.ca.

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