Monday, August 19, 2013

The New "Big Boy" Rules

The current "big boy" rules hold that large, purposeful and powerful stewards of perpetually entrusted funds -- like pensions, endowments, foundations, sovereign wealth funds and family wealth funds -- don't need the consumer protections of required disclosures that the little guys get under the Securities Laws.

The new "big boys" agree. Only the little guys financialize. The "big boys" don't speculate. They negotiate.

The first bold steps towards these new rules are already being taken, as was reported yesterday in the New York Times on-line article by Nathaniel Popper:   Public Funds Take Control of Assets, Dodging Wall Street

The article reports on the proceedings of a recently completed meeting of the Institutional Investors Roundtable to which Wall Street was not invited. It details the first important moves being made by public pension funds and other stewardship investors to take control of their private equity investments.

The focus of the article is on fees, but one or two more changes, to transform standard private equity into more perpetually prudent Evergreen Private Equity, will expand the list of empowerments to include all these:

  • engineered portfolio performance;
  • simplified portfolio design;
  • internalized portfolio management;
  • reduced portfolio costs;
  • controlled portfolio impacts.
All of the above empowerments will come from negotiating direct investments directly with values-driven enterprise leaders. To achieve the full benefits of this negotiated approach to enterprise investment, our large, purposeful and powerful stewards of perpetually entrusted funds need to make these two small changes to the standard PE model:
  1. eliminate all artificial sell-by dates
  2. de-emphasize exit-by-sale to re-emphasize cash flow sharing, currently and in perpetuity.
These two small changes will radically transform the relationship between capital and wealth creation, and popularize the new "big boy" rules of direct participation through perpetually prudent negotiated investments constructed on the patterns of Evergreen Private Equity.

In an attempt to cut-off this move to the new rules, proponents of standard private equity are warning stewardship investors against trying to internalize portfolio management, as in this quote from Steve Judge, president of the Private Equity Growth Capital Council, as reported in the article:

“Those investing outside of traditional private equity partnerships will find it very challenging and expensive to recruit the talent and experience necessary to replicate those results.”

That may be true under the old rules of standard PE, but under the new rules of Evergreen PE, it won't be. Internalizing portfolio management is truly empowered by EPE.

However, the more important of the empowerments of EPE that cannot be achieved through standard PE  are engineering performance and controlling impacts. That's how stewardship investors generally, and pension plans in particular, will maintain the balance in funding their plans while meeting their multi-generational fiduciary duties.

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