PSPF may still avoid private equity despite new rules

Jul 3, 2019

The proposed lengthening of its external mandates will make it easier to invest in private equity. The Taiwan pension fund isn't raring to take advantage though.

PSPF may still avoid private equity despite new rules

Taiwan's $18.75 billion Public Service Pension Fund (PSPF) isn't planning to dive into private equity even if new rules come into force that would ease the restrictions on such investments.

A draft bill proposed by the Taiwanese body that oversees public sector workers, the Examination Yuan, would lengthen the maximum tenure of mandates for alternatives to 12 years from the current five to enable greater flexibility and improve the chances of better returns.

But PSPF, which serves the retirement needs of civil servants, teachers and military personnel, still isn't minded to invest in private equity, even with the proposed changes – not according to one PSPF executive AsianInvestor spoke to.

“The passing through [of the bill] doesn’t mean that we will do it; it only means from a regulatory perspective this flexibility is allowed,” she said on condition of anonymity.

Citing “lack of relevant internal rules on such investments”, she said PSPF has no plans currently to invest in domestic private equity.

By investing in companies that aren't listed on stock exchanges and as a result cannot be bought and sold easily, private equity is a relatively illiquid and complex investment class. But it is often said to command an illiquidity premium because of the extra time and skill required to unlock its hidden value, which is why longer mandates can help.

The Examination Yuan's draft bill uses the words “alternative assets” but the proposed mandate extension really pertains to just private equity, the PSPF executive said.

PSPF has its own classification of alternative investments, which includes real estate investment trusts, infrastructure stocks and multi-asset (stocks and bonds combined). Together these account for about 5% of its NT$581.9 billion ($18.75 billion) portfolio, she said.

It could still be at least a couple of months before the bill is passed by the country's government, she added.

The seeming lack of interest from PSPF, even so, may disappoint local authorities targeting institutional investors for investments into private equity funds to support the local development of new industries in line with Taiwan's strategic plans.

A government scheme published in June last year aims to direct insurance funds into the so-called “five plus two” innovative industries, as well as into the public construction and long-term care sectors.

The “five plus two” refers to five pillar industries – the internet of things, biomedical, green energy, smart machinery and defence, subsequently expanded to include new agriculture and the circular economy (related to the recycling of products).

MANDATE PLAN

PSPF had 38.05% of its assets entrusted to external managers as of May-end this year. Overseas investments accounted for 48.5% of its portfolio.

In November last year, PSPF invited fund managers to bid for a five-year domestic equity mandate of NT$30 billion, which was subsequently awarded to Uni-President, Fuh Hwa, Cathay, Prudential, Capital and Nomura.

The fund managers are required to follow an absolute-return strategy and should meet an annual target return of 50 basis points above Taiwan’s Taiex Total Return Index.

However, the PSPF executive said there will unlikely be any mandate plan this year, as there is little new funding. The contributions to the fund are currently less than distributions, she said.

Taiwan’s biggest pension fund, the Bureau of Labor Funds, has also said that it may not issue any new mandates this year. That was after it postponed a plan to issue a multi-factor bond mandate, having failed to find a suitable benchmark.