Private equity gains favour with investors

SEI survey finds investors increasingly favourable to private equity but they are also being more demanding

Private equity managers need to demonstrate better reporting and risk-management measures to retain and gain assets among an increasingly demanding institutional investor base, says a new report published by SEI in collaboration with Greenwich Associates.

The survey, entitled “The Logic of Fund Flows”, found that institutional investors are turning to private equity as a source of alpha. More than a quarter of those surveyed (26 percent) plan to increase their private equity allocations over the next 12 months.

Another survey, published by LPEQ and Scorpio Partnership in July, confirmed the trend with the finding that 50% of wealth managers, at private banks, asset management groups and banks, “are looking to increase their private equity allocation in the coming year”.

The findings follow on from positive market news in the private equity sector, says SEI. More than 300 exits worth an aggregate value of $120.1bn were logged in the second quarter of 2011, far outpacing the previous record of $81.5bn in the second quarter of 2010.

However, they are also expecting greater transparency, reporting and risk management from the managers, the survey says. The criteria for evaluating managers still revolves around the traditional three Ps of People, Investment Philosophy and Investment Performance as the most important manager selection criteria. Another ‘P’, Process, is gaining importance. To that end, investors ranked portfolio transparency, fees and quality of reporting and communications as very important factors in the selection process as well.

Investors and consultants were found to have different investment objectives. More than two-thirds of investors (68 percent) point to return potential as their primary objective as opposed to 10 percent of consultants. Fifty percent of consultants, meanwhile, said diversification was their primary investment objective as opposed to only 18 percent of investors.

“As investors are looking to achieve higher returns in an increasingly challenging return environment, private equity is coming back, but standards are higher across the board,” said Rodger Smith, managing director at Greenwich Associates.

Phil Masterson, senior vice-president and head of business development, Europe, for SEI’s Investment Manager Services division, said: “This survey confirms what we’re hearing from our clients–investors are demanding more from managers across asset classes. While investors see private equity as an area of opportunity, they expect more from the managers in which they invest. They want greater transparency, better reporting, and lower fees. Those can only be achieved with greater operational effectiveness and that’s what it takes to compete in the ‘Era of the Investor’.”

Investors are also investing in a greater variety of private equity asset types as the sector matures. In fact, more than 80 percent of investors polled said they invested in venture capital, leveraged buyouts, growth capital, distressed investments, and mezzanine capital. The secondary market for private equity is also thriving as investors are buying or selling to meet liquidity demands or pick up deals at deeply discounted prices.

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