Institutional Investors to Increase Emerging Market Private Equity Exposures

Emerging markets will play a bigger role in the private equity portion of institutional portfolios, with Asia and Central and Eastern Europe/Russia receiving the most interest.

The Emerging Markets Private Equity Association’s Survey of Limited Partner Interest in Emerging Markets Private Equity found 42% of respondents expected to increase investments in this category in 2007. Foundation and endowment funds were the most active investors, with an average of 13.2% of their private equity portfolios allocated to emerging markets. Of the investors surveyed, 79% expected to invest in Asia in 2007 and 89% expected to do so by 2012. Among respondents, 61% expected to invest in Central and Eastern Europe/Russia in 2007 and 87% planned to do so by 2012. One-fifth of respondents (20%) were actively or opportunistically investing in Africa this year. The study can be found at empea.net.

Initiative on Global Markets Fosters Exchange of Ideas

Launched in 2006, the University of Chicago Graduate School of Business Initiative on Global Markets (IGM) explores business, financial markets and public policy issues.

Among the research topics to be covered in the coming academic year are the surge in delinquencies in the sub-prime mortgage market and the future of private equity.

In addition to research projects, IGM promotes a greater exchange of ideas between GSB researchers and decision-makers in the private and public sectors. It will do this through conferences, the Myron Scholes Forum of prominent guest speakers, and enhanced interaction with corporate partners so that academics and practitioners can benefit from each other’s insights. Corporate sponsors of the initiative are Northern Trust, AQR Capital Management, Barclays Bank and The Chicago Mercantile Exchange. For more information, go to research.chicagogsb.edu/igm.

SRI Funds in DC Plans

Almost one in five defined contribution plan sponsors offers at least one socially responsible investment option to participants, and that number is expected to grow to 60% of sponsors within three years.

Defined Contribution Plans and Socially Responsible Investing in the United States, a survey commissioned by the Social Investment Forum and conducted by Mercer Investment Consulting, found alignment with an organization’s mission was the primary driver for adding an SRI option to a defined contribution plan. Health care organizations and government funds are most likely to offer SRI fund options to participants. For more information, go to socialinvest.org.

OECD Provides Financial Trend Analysis

The Paris-based Organisation for Economic Co-Operation and Development (OECD) publishes Financial Market Trends twice each year. The publication provides analysis and information on structural issues and developments in major global financial markets.

Articles in the current edition include:

• “An Overview of Hedge Funds and Structured Products: Issues in Leverage and Risk”
• “The Private Equity Boom: Causes and Policy Issues”
• “The Role of Private Pools of Capital in Corporate Governance: Summary and Main Findings about the Role of Private Equity Firms and ‘Activist’ Hedge Funds”
• “Longevity Risk and Private Pensions”
• “Asset Allocation Challenges for Pension Funds: Implications forBond Markets”
• “Governments and the Market for Longevity-Indexed Bonds”
• “Housing Markets and Household Debt: Short-Term and Long-Term Risks”
• “Government Debt Management and Bond Markets in Africa”The full publication is available on-line at oecd.org.

Lower Commissions May Affect Research

Institutional investors predict that half their U.S. equity trades will be conducted through electronic and portfolio trading systems by 2010. This development could have a significant impact on the research they receive from brokers, according to a Greenwich Associates report.

The 2007 U.S. Equity Investors Study found that blended commission rates for institutional single-stock, program and direct-to-market electronic trades averaged of 3.16 cents per share during the one-year period ended February 2007, down from 3.9 cents in 2006 and 4.0 cents in 2005. As a result, equity brokers are reassessing the amount they spend to provide research and other services to clients. The Greenwich report predicts institutions, in turn, might need to cut back on the research and services they use, persuade brokers to provide the services for less money, or find another way to pay for the services. For more information, go to greenwich.com.

DC Plan Transitions Need Particular Care

In a new paper, Northern Trust’s Transition Management Team discusses the unique circumstances involved in restructuring defined contribution (DC) plan portfolios. For instance, many plan sponsors consider a blackout period during a transition event, but this is undesirable to participants. The Northern Trust paper outlines steps to ensure a smooth portfolio restructuring. They include:

• Hiring a transition manager early: A defined contribution plan transition requires more planning and coordination than a defined benefit plan transition.
• Coordinating all involved parties: Regular communication and input from the plan sponsor, consultant, transition manager, fund accountant daily valuation team, custodian and investment managers is critical.
• Developing a timeline: The more lead time the better. Aim to develop the timeline at least one month prior to the transition.
• Mapping fund flows: This will detail projected movement of assets and help coordinate fund flows.
• Planning for liquidity: Ask the plan record keeper to provide an expectation of participant fund flows for the past two or three months.

Download The Defined Contribution Plan Transition paper or contact your relationship manager for copy.

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