Anything PE shops can do, pension funds can do better

Index funds are a smarter bet than mutual funds for retail investors, just because their fees are lower. So why do big institutional investors invest in private-equity companies which charge enormous fees, and which in turn hire investment banks which charge their own enormous fees, rather than simply buying companies themselves?

Ontario Teachers Pension Plan seems to have decided that enough is enough - and has decided it's going to make its own bid for BCE (a/k/a Bell Canada). Private-equity shops such as Providence Equity Partners might be invited to join the buyout party, but then again so are real-money investors such as Caisse de Depot et Placement du Quebec and the Canada Pension Plan Investment Board, according to the NYT.

This is very much a welcome development: it shows that institutional investors are beginning to realize that their own investing skills have a pretty good chance of outperforming any PE or hedge fund, once those enormous fees are taken into account. (Hedge funds do generate alpha; they just pay nearly all of it to themselves in the form of fees.) So whether or not the BCE takeover ever happens, an important precedent has already been set. Pension funds can be in deals from the beginning, rather than being brought in at the end to provide that last chunk of equity finance.