Business failures and deal write-offs are a fact of life in private capital markets, particularly during temporary downturns in cycles. In a long-term, diversified and risk-balanced portfolio managed by seasoned investment specialists, these should not ultimately affect net financial returns. Failures can frequently gain much more profile and media attention, however, than successes. For multi-stakeholder pension funds, this is publicity that can be hazardous to the point where eventual risk-adjusted returns no longer count. Equally alarming may be costly, high profile legal conflicts over the sorting-out of liabilities in the case of deals-gone- sour and termination of partners and pools.
As Figure 19 shows, a total of 64 percent of PIAC respondents rated this barrier as important (30 percent) or very important (34 percent). Large pension funds gave it above-average emphasis (69 percent important/very important).
Many PIAC respondents spoke of the deleterious effects felt inside a pension fund when the details of a failed investment are published and circulated. Many funds eschew all forms of profile and publicity, let alone much unwanted negative attention. Governing fiduciaries, noted some respondents, are especially sensitive to this happening and the result is sometimes impaired decision-making at this level. As one PIAC member put it: “Bad decisions last longer than good ones.” Some also believe they have little recourse when failures occur in private capital markets since, in many instances, fiduciaries are unable to take effective action against external professionals managing pools due to the terms of legal contracts.