Europe’s private equity investors a disappointed lot, studies find

There is a worrying high mismatch between private equity managers and their clients across a range of matters from returns, to fees, to communications, as a year approaches when mid-market private equity firms are expected to seek over €50bn from European investors.

European mid-market fund placement specialists Acanthus said 2012 would be “one of the most decisive years in the industry’s history for [such] fundraising, [but] the relationship between LPs and GPs remains as challenging as ever.”

It noted in its annual private equity survey, “there is little agreement on terms and conditions and on the level and quality of communications to investors.”

Meanwhile, consultants bfinance identified in its own annual survey significant mismatches between what long-term net returns pan-European private equity fund investors expect, and what their managers actually deliver.

Acanthus said: “The market dislocation caused by the global financial crisis over 2008-2009 has unearthed a number of uncomfortable realities about the LP-GP relationship and the limitations of historic arrangements.”

Primary among these was how each side rated its relationship with the other side.

About 40% of managers (GPs) said it had an “excellent and solid” relationship with investors, but only 15% of investors (LPs) agreed.

Similar divergence was also evident in terms of communications, with 65% of GPs but only 12% of LPs describing them as good. One third of LPs, and no GPs at all, said communication was ‘poor’.

Between 20% and 40% of investors described GP communications concerning areas such as underperforming investments, team changes and strategy changes as ‘poor’. Not one single GP agreed.

“The findings of this research clearly demonstrate that general partners must do more to meet the demands of their investors,” said Armando D’Amico, managing partner of Acanthus Advisers.

“As a huge number of funds come to market over the next year, chasing scarce capital, the quality of a GP’s communications and relationships will, in many cases, be a decisive factor.”

Acanthus’s findings on fee structures suggest managers are generally happy with them. Investors are generally not.

The feeling that fees are a problem grew stronger among LPs this year compared to 2010 (rising from 89% to 97%), while among GPs the feeling fees are a problem weakened (falling from 41% to 28%).

 

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