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Macquarie Funds Management began its discretionary global private equity advisory service in 2003. To date, Macquarie Funds Management has three advisory clients for which it provides ongoing advice to assist in developing tailored private equity programs, investing on a discretionary to semi-discretionary basis.
The path to an effective private equity program in a large public pension plan can vary from plan to plan based on numerous factors inherent to the goals of the individual plan, which creates the need for customized solutions tailored to meet the individual plan's needs.
Our collaborative process is structured into four important phases:
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Portfolio construction
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Commitment projection
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Investment selection
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Proactive monitoring
This process in its entirety provides a virtuous cycle, which we believe positions our clients for superior investment selection.
Portfolio construction
We have developed a proprietary Private Equity Optimization Model, which takes expected returns, expected standard deviations and expected correlations for the different sub-sectors of private equity. Using our expectations and our proprietary model we are generally able to generate portfolios that are customized to achieve specific investors’ risk preferences across the private equity asset class.
Commitment projection
Our proprietary commitment projection tools are used to systematically diversify private equity commitments across vintage years. This we believe enables investors to reach and consistently maintain their targeted percentage allocation to private equity in an efficient and prudent manner. Importantly, we seek to ensure that commitments are well diversified over time, thus concentration to any one vintage year is minimized.
Investment selection
The goal of investment selection is to proactively access and invest in top performing fund managers. We construct concentrated portfolios that we believe will be positioned to outperform their benchmark. Generally, we recommend making five to seven investments per year and maintaining 20 to 30 active material direct relationships as the program matures. Based on our research this strategy should result in a very well-diversified program and position it to produce strong investment results.
Proactive monitoring
We view the investment monitoring process as a form of ongoing due diligence on a manager. We expect to have regular conversations with the management team and then detailed quarterly monitoring updates for each investment. Through this review, we seek to remain appraised of a manager’s investment activities, allowing us to form an opinion on factors such as the overall risk levels of a fund, the ongoing integrity of a manager’s investment strategy, market environment and input into staff turnover. As issues arise, we expect to discuss them with clients along with our recommendation on a course of action.
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