Former LP reflects on changing industry

Bruce Feldman, the long-time head of the alternative investments programme at the $27.6 billion Pennsylvania State Employees’ Retirement System, knows full well the growing divide in the limited partner community.

One of the more significant changes he saw in the industry during his time at the system was the gradual divergence of certain limited partners from the rest of the pack, separated by their ability to get favourable treatment from general partners not available to other investors.

“The ability to influence the terms of the transaction changed. Money always talked, but [it used to be], the earlier one could get involved with the GP … the more influence you would expect to have,” Feldman said during a recent conversation with sister publication Private Equity International.

“The longer I did the job, the more I realised the industry evolved. Key LPs emerged who were much more influential in how the partnership was structured. In many cases they were able to negotiate more favourable arrangements for themselves, for example, in side vehicles or other arrangements,” Feldman said.

Feldman’s observation reflects a growing tension among LPs over the issue of big investors having access to better terms and conditions, co-investment opportunities and even separate accounts customised specifically for them.

Mario Giannini, chief executive officer of Hamilton Lane, defined the issue earlier this year during an industry conference as a “fragmentation” of the LP community. “It’s something we’ll all have to watch – what was formerly a fairly unified LP community fragmenting into how they want to invest in private equity,” Giannini said at the time.

However, Feldman did not necessarily think it was a bad thing that certain investors were afforded advantageous opportunities – it was just the way business worked. “That’s kind of the way it is. I don’t know that it’s a bogeyman, but people need to be aware of it,” Feldman said.

These days, Feldman works as an investment advisor at Health Evolution Partners, which he joined in January, according to a statement from the firm.

Since Feldman’s departure, the system has undergone some big changes. Lauren Lenfest, who had been the co-director of alternative investments, was promoted to full director last year. The system this year also switched from its long-time private equity consultant Cambridge Associates to StepStone Group.

The system’s plan for the asset class going forward includes a reduction of exposure to alternative investments to 14 percent over 10 years, and without using a secondary sale to reduce the allocation, the spokesperson said in a prior interview.

As part of the plan, the system will reduce relationships from 149 to between 60 and 80 in five years and then between 40 and 50 in 10 years.

Pennsylvania will limit new commitments to $500 million a year and explore various initiatives, including separate accounts and reducing investment fees, according to the 2012-2013 strategic investment plan the system released earlier this year.