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Institutional Investor Profile: Stuart Imeson, Head of Pensions and Investments, West Yorkshire Pension Fund

Stuart Imeson on why West Yorkshire Pension Fund invests the majority of the capital dedicated to private equity investments with big funds and the role his organisation plays in Yorkshire. He also explains his portfolio strategy.

Stuart Imeson, an accountant and a member of the Chartered Institute of Public Finance and Accountancy, has been head of pensions and investments at West Yorkshire Pension Fund since 1992, and before that he had been head of investments since 1985. Imeson oversees the management of all aspects of the West Yorkshire Pension Fund, one of the largest UK local authority funds. Its members are employees of 175 public and private sector employers, operating predominantly in the region.

Bradford Council is the administering authority for the West Yorkshire Pension Fund. The in-house investment team consists of 17 members of staff, 12 of who are involved in the investment management and five are back-office. The West Yorkshire Pension Fund has £5.2bn of assets under management. Besides private equity it invests in public equities, bonds, property and hedge funds.

How would you describe your private equity investing experience?

'It has been a good experience for us. We have achieved some particularly good returns on some funds, others have done reasonably well, and we have not had a single bad experience to date. We have actually achieved what we had been hoping for from our exposure into private equity.'

What is your strategy for private equity investments?

'We first started investing in private equity in the late 1980s because we were trying to get enhanced returns over and above traditional equities. I think everyone accepts that private equity is a more volatile, perhaps a riskier element of a portfolio, but if you get in with the right private equity managers, things should be OK.

We increased our target allocation to private equity in 2001, from one to three per cent, and then again in 2004, from three to five per cent because in terms of commitments at the time we were pushing towards the three per cent limit. Overall, it was a good move since it adds to the diversification of our portfolio. The investment process in private equity can be slow, and it will take a while before we see the results of our new, increased allocation to the asset class.

Currently we have commitments of about £200m in place in private equity funds, but drawn down and invested are only around £75m, which represents around 1.5 per cent of our total investment portfolio.

We have built relationships with nine managers of private equity funds and funds of funds, and, providing performance is solid, we are happy to support these nine with their new funds going forward. Some of the funds we are investing in are Europe-focused, others are US-focused. Recently we went into a secondary fund to help diversify our portfolio more.

We tend to invest in the bigger quality-funds, with a fund target size of £1bn upwards, as we prefer not to have too big a share in a fund, which could be the case with investing in a small fund. The private equity funds we have committed to are organisations which are well-established, have a very good track record, and they all demonstrate a good continuity of managers within the organisation in terms of key people.

Currently we are invested in or committed to invest in 23 private equity funds, managed by the nine private equity fund managers. Funds managed by Barclays, Bridgepoint, Goldman Sachs, HarbourVest, JPMorgan, Schroders, and Standard Life form the core of our portfolio, with YFM Group and Aberdeen Murray Johnstone managing some regional funds we are invested in. The regional funds provide the opportunity to put some private equity investment into the local economy.

We do not really look for private equity funds from new managers (new to us) any more, because we believe that the number of managers that we currently have in our portfolio is sufficient in terms of diversification. We would, however, have a close look at any new regional private equity fund being launched by a manager we currently have no relationship with.

Our typical commitment per fund is £15m. However, we never invest more than 30 per cent of our private equity portfolio with any one manager. For our regional private equity funds we have a target allocation of between ten and 15 per cent of the private equity portfolio.

In terms of geography, we are looking for a good mix of UK, Continental European and US funds and funds of funds. The biggest proportion of our portfolio is in the UK and Continental Europe, although we have a reasonable exposure to the United States. We are not looking to go into emerging markets funds or funds that might be investing in a specific country, other than the UK and the US.'

How would you describe a good GP?

'Continuity of the management team is very important to us. We need to be sure that the people who have built the past track record are still there and will manage our capital if we decide to invest with them. Another important factor is that the GPs put their own money into the funds.'

Which aspects are especially important in your relationships with GPs?

'We get very good reporting back from our GPs, usually on a quarterly basis. We also meet up with them on an ongoing basis for portfolio reviews, on average once or twice a year. In the reviews they would go through the fund(s) we are invested with and highlight what has been happening, which companies have performed well and those that have not gone too well. With the funds of funds we do exactly the same: we look at which funds they have been investing in. A few of our GPs send us an e-mail each time they make an investment. In general we are well catered for in terms of information and that is important, as we decide on the current funds' performance whether or not we invest in the GPs' next funds.'

Do you make direct investments?

'We do not have the in-house resources to do that and we are not planning to get the resources. We do not want to go down that route.'

In the past you also raised funds - is that something you will look into again in the near future?

'In order to get some cash working in the local economy, we established a series of bespoke regional funds. We have raised Yorkshire Investors I, II and III - with £15m invested in each. Basically, we were looking for a private equity manager who had offices located in Yorkshire and other parts of Northern England. When deals have been done from those offices, we have taken part of those deals into our bespoke fund. The only criterion we would put on is that we should not invest more than £1m into any one company within the regional fund.

The first two bespoke regional funds were managed by Bridgepoint, which had offices in Leeds and Manchester. The third fund, launched back in 2001, is being managed by Aberdeen Murray Johnstone, which has offices in Leeds, Manchester and Glasgow. By 2001 Bridgepoint had launched two big pan-European funds and was no longer in a position to manage a further regional fund for us.

The third fund is now around 50 per cent invested. When it is fully invested, we will again review the situation on the regional funds front, and may possibly launch a fourth bespoke regional fund.

We have an Investment Advisory Panel. The Panel is made up of ten local councillors from the five local authorities that are in the West Yorkshire Pension Fund, two trade union representatives, two officers and two external investment advisors. All of our private equity fund investment proposals are put to the Panel for agreement and approval. The desire to have a small percentage of the private equity portfolio supporting regional/local companies is something that the Panel has encouraged.'

How many investments a year do you make in private equity on average?

'That largely depends on how many of the nine GPs we already have investments with are fundraising. On average, we probably do about four or five investments per year. Recently most of our GPs have been out fundraising, and that is why the pace of investment is currently higher than normal.'

Do you expect your allocation to increase beyond five per cent in the future?

'I think it would be a hard decision to push beyond five per cent. Private equity is a riskier part of the overall investment portfolio, and whilst it adds a useful element of diversification we would not want to be overly exposed. We also have one or two restrictions within the local authority pension funds through regulation as to how much we can invest in unlisted securities and limited partnerships. Currently the limit is 15 per cent.'

What advice would you give to an investor new to private equity?

'Know the private equity managers who you are investing with. We did a great deal of due diligence on the managers at the time when we selected them.

You also need a good back-up support arrangement whereby you receive regular and updated reports on how the funds are performing. Sometimes it may be difficult to know how funds are actually performing until they start to realise investments.'

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