In this weekend’s FT, Gillian Tett sets out the problems she has with the determination of a state court of Louisiana (in New Orleans) , throwing out demands for greater disclosure and transparency from the managers of and those funded by private equity.

Her three problems are

1. That the partisan nature of America makes the legislative protections something of a Zipcode lotters
2. That bad actors will use republican states to get away with bad practice through regulatory arbitrage. Private equity will find the easiest place to register.
3. That the use of private capital in the US is now so prevalent that buyers need to be more aware – they need to be better buyers.

Necessarily, some of the private equity available to UK investors will originate from states like Louisiana but not all. Private equity funds re-registering in states with lax legislation should be creating at least amber flags to investors. UK investors, who can afford to be choosy, can choose where to invest. But not if the investments are made for them by fund managers with a less than scrupulous attitude to transparency.

Since most exposure to private equity is through funds, then the relationship between the purchasers (whether HNW family offices, pension fund trustees or other institutional investors) needs to be first hand. Intermediaries can introduce but there needs to be a much better form of due diligence when investing in less transparent markets.

I say this because there is a commonly held view that it is only large pension funds who can afford to invest in illiquids. I do agree that size matters, but it is the size and strength of the investment team , not just the weight of assets that count. This is the challenge to many of the occupational schemes (especially the commercial master trusts) that are being asked to invest – home and away – in productive capital that delivers long-term returns.

Simply relying on received wisdom and following the herd led several large pension funds to buy most of Thames Water. Schemes like Omers and USS will be much more cautious next time but accountability for the write off of billions of pounds worth of investment takes thick skin. It is not enough to have taken investment advice. Here is a comment on Linked in from XPS , relating to their bold initiative to facilitate the use of private equity in smaller DC funds. The comment was in reply to a Private Equity researcher and fund manager asking where DC saver’s money would go.

The reason for the lack of specifics regarding fund managers is because individual DC Schemes will have the flexibility to choose different combinations of public and private market funds managed by professional fund managers to meet their individual objectives. XPS will research the fund managers but don’t manage assets directly. – Neil Maines

Herein is the problem. The value of private equity is to a large extent secret and it needs to be unlocked by people who have skill, experience and a deep understanding in what they are investing in. They need proper information whether that is available on the inside or through information in the public domain.

These kind of people are in short supply. They need to be perceptive and to take decisions on their own behalf , rather than following the herd. They need to be bold in implementation and brave when things go wrong. They need to be accountable.

You can be a large fund and not make good decisions (USS , Omers and Thames Water), you can be a small DC pension fund and get good advice (let’s hope that XPS can manage that).

The key constraint in purchasing private equity is not liquidity but competence; not price but courage and a considered conviction..

Private equity is not for dummies.