INSTITUTIONAL INVESTOR SENTIMENT SURVEy - PEI Media

Institutional 

Investor 

Sentiment Survey 

juLY 2012

foreword 

Understanding how institutional investors operate and think is crucial for fund managers 

to thrive in this harsh fundraising environment. GPs must realise that their relationships 

with LPs should go far beyond just a traditional alignment of interests. Today’s LP-GP 

relationship has become a more equitable partnership where GPs increasingly accommodate 

LPs’ concerns and demands in their fund structures. 

It is no longer enough for a GP to promise high returns to investors. Issues such as 

management fees, carried interest, “zombie funds” and communication are now standard 

talking points for LPs during the negotiation process. While some strides to clarify LP 

terms have been made by organisations such as the Institutional Limited Partners Association, 

many GPs continue to mistake the needs of LPs as one-off requests rather than 

a fundamental shift in the LP-GP relationship. 

The need to understand LPs and react to their requirements has never been more 

important. Therefore, the Research Unit at Private Equity International has undertaken 

an Institutional Investor Sentiment Survey in order to gauge the opinions of prominent players 

in private equity markets. With topics ranging from fees to the LP-GP relationship, 

current allocations to future appetite, the survey aims to present a concise and detailed 

analysis of today’s global LP. 

This report is an essential reading for fund managers – whether they are launching 

their first fund or are seasoned professionals – advisory firms and the institutional 

investors themselves. Our extensive survey not only sheds light on how LPs believe the 

alternative asset class is evolving but also places the findings in the context of today’s 

private equity markets. 

I hope you find our Institutional Investor Sentiment Survey both an informative and 

interesting read. 

Larry Oberfeld 

Senior Analyst 

Private Equity International 

institutional 

investor 

sentiment 

survey 

• foreword 

executive summary 

allocation 

fees 

lp – gp relationship 

future investments 

and concerns 

appendix: global 

fundraising 

Institutional Investor 

Sentiment Survey 

Director of Data Products 

Dan Gunner 

Tel: +44 20 7566 5423 

dan.g@peimedia.com 

contents 

01 Foreword 

03 Executive Summary 

06 Allocation 

11 Fees 

21 LP-GP relationship 

29 Future Investments and 

Concerns 

37 Appendix: Global 

Fundraising 

Contributors 

Thelma Azolukwam 

Sacha Batica 

Madeeha Chaudhry 

Vincent Law 

Sales 

Joss Onion 

Tel: +44 20 7566 4283 

joss.o@peimedia.com 

Sean Bookstaver 

Tel: +1 212 633 1075 

sean.b@peimedia.com 

Senior Analyst 

Larry Oberfeld 

Tel: +44 20 7566 5467 

larry.o@peimedia.com 

Head of Production 

Tian Mullarkey 

Tel: +44 20 7566 5436 

tian.m@peimedia.com 

Production and Design Manager 

Miriam Vysna 

Tel: +44 20 7566 5433 

miriam.v@peimedia.com 

page 1 

www.privateequityconnect.com

institutional 

investor 

sentiment 

survey 

foreword • 


allocation 

fees 



and concerns 


fundraising 

page 2 

About PEI 

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EXECUTIVE 

SUMMARY 

Combining the responses of 100 prominent private equity institutional investors with 

propriety information sourced from our databases, the Data Division of Private Equity 

International completed extensive research to present the Institutional Investor Sentiment 

Survey. Our analysis found that: 

• Over half of surveyed respondents stated that they had no plans to increase their 

allocation to private equity beyond their current levels, reinforcing the belief among 

fund managers that fundraising has become increasingly challenging. (page 8) 

• Almost three quarters of LPs indicated that, at present, they have no plans to increase 

their number of fund commitments. Of these, almost half are looking to reduce the 

number of relationships they have. (page 9) 

• 90 percent of LPs believe that management fees should be reduced following the 

conclusion of a fund’s investment period and 64 percent of LP respondents believe 

that they should receive a fee break as an early investor in a fund. (page 11 and 12) 

• Over 35 percent of institutional investors believe that fund managers should charge a 

1.5 percent management fee in order for them to consider making an investment in 

a private equity fund. Almost half of survey respondents cited high management fees 

as sufficient reason to not commit to a fund manager. (page 13) 

• 69 percent of LPs believe that the eight percent optimum hurdle rate is just right 

when considering funds in developed markets, although for emerging market-focused 

funds, it is too low. (page 15) 

• 69 percent of respondents insist that senior members of investment firms should 

communicate with LPs during the fundraising process, whilst 63 percent want GPs 

to provide more detail on their fund’s structure and investment focus. (page 25) 

• Only 14 percent of investors would happily work with a placement agent, with 40 

percent of investors saying that their decision would depend on the placement agent 

themselves and 46 percent preferring to deal directly with a GP, ignoring the placement 

agent. (page 31) 

• The majority of respondents (85 percent) have had a request from at least one of their 

fund managers for a fund extension in the past year, with 42 percent of LPs having 

been approached by more than 10 percent of their fund managers for an extension 

on the original fund terms. (page 33) 

• Almost 80 percent of survey respondents expressed concerns about zombie funds in 

their investment portfolios while over 70 percent of LPs are concerned about the effects 

of the sovereign debt crisis on their private equity investments in 2012. (page 34) 

institutional 

investor 

sentiment 

survey 

foreword 

• executive summary 

allocation 

fees 



and concerns 


fundraising 

page 3 


LP Respondents Breakdown 

Where is your institution headquartered? 

n 

n 

n 

n 

n 

n 

n 

n 

n 

43.7% 

5.2% 

0.7% 

9.6% 

31.1% 

4.4% 

0.7% 

3.7% 

0.7% 

US 

Canada 

Central and South America 

UK 

Europe ex-UK 

Middle East & Africa 

Japan 

Asia ex-Japan 

Australia & New Zealand 

institutional 

investor 

sentiment 

survey 

foreword 


• 

Source: Private Equity International 

What is the total size of your institution’s investment portfolio? 

n 

n 

n 

n 

n 

n 

9.6% Over $100 billion 

2.2% $50 to $99 billion 

8.9% $20 to $49 billion 

24.4% $5 to $19 billion 

34.1% $1 to $4 billion 

20.7% Under $1 billion 

allocation 

fees 



and concerns 


fundraising 


What percentage of your institution’s total investment portfolio is 

allocated to the private equity (and venture capital) asset class? 

n 

n 

n 

n 

n 

61.2% More than 15% 

12.7% 10% to 15% 

12.7% 5% to 10% 

8.2% 2% to 5% 

5.2% Less than 2% 


How long has your institution been investing in private equity? 

n 

n 

n 

n 

67.2% 

20.9% 

8.2% 

3.7% 

More than 10 years 

5 to 10 years 

2 to 5 years 

Less than 2 years 

page 4 



Focus on… Pension Funds 

Distribution of Pension Funds by Region 

350 

300 

250 

No. per region 

200 

150 

100 

50 

0 

Asia- 

Pacific 

CEE 


Latin 

America 

MEA 

North 

America Western 

Europe 

institutional 

investor 

sentiment 

survey 

Pension funds have primarily invested in buyout funds with 60 percent of all pension 

funds currently or previously investing in the fund strategy, primarily in North America 

and Western Europe. In particular, North American pension funds have a considerable 

preference for domestic vehicles, with just over 90 percent of all American and Canadian 

pension funds currently invested in Northern American private equity funds. Similarly, 

Asia-Pacific pension funds exhibit an almost identical trend, with 90 percent of all pension 

funds investing in a regional private equity fund. 

But with the growing prominence of emerging markets, pension funds are increasingly 

looking to take advantage of opportunities presented in these regions. China, in particular, has 

fast become a very attractive destination for capital, with better regulation of markets and a 

more stable investment environment. Currently, 45 percent of all pension funds globally have 

an appetite for investing in Asia-Pacific private equity funds. 

In addition, uncertain market conditions have led to the rise of separate accounts and 

co-investment partnerships. Pension funds are taking a greater interest in how their capital is 

being utilised, and both of these investment strategies provide investors with a higher degree of 

control and transparency. CalPERS CIO Joseph Dear outlined some of the benefits of creating 

customised arrangements with managers, namely “better alignment of terms and conditions”. 

Given that investors are wary about forming new relationships with fund managers in the current 

economic climate, it makes sense for pension funds to take advantage of their existing GP 

relationships, especially if they intend to maintain the size of their private equity programmes. 

The Employees Retirement System of Texas launched a co-investing programme in late 

2011 in a bid to slash their fees and carry expenses. At the same time, the retirement system 

does not intend to lower their overall commitment to the asset class, choosing instead to form 

fewer new relationships, paving the way for more tailored LP-GP agreements. 

As the private equity industry gears up for the second half of 2012, there are two clear 

trends emerging from the financial downturn and the European sovereign-debt crisis. There 

will be a gradual improvement for pension fund assets coinciding with the growing importance 

of emerging markets in addition to an increasing level of scrutiny by pension funds on their 

limited partnerships. 

foreword 


allocation 

fees 



and concerns 


fundraising 

page 5 


Allocation 

institutional 

investor 

sentiment 

survey 

Current LP Allocation 

Snapshot 

foreword 


allocation 

• 

fees 



and concerns 

Geographic Allocation 

% 

30 

25 

20 

15 

10 


fundraising 

5 

0 

Asia- 

Pacific 

CEE 

Latin 

America 

Middle 

East/ 

Africa 

North 

America 

Western 

Europe 


page 6 

Data from Private Equity International shows that North America and Western Europe remain 

the most popular regions for allocation to private equity, with a respective 26 percent 

and 21 percent of LPs currently investing in the region. Asia-Pacific is close behind with 

19 percent of LPs currently allocating capital to the region. This is no surprise given the 

emergence of India and China as particularly attractive investment opportunities. Whilst 

they have undergone rapid growth over the past few years, there is still much potential 

in the region and investors are keen to take advantage of the opportunities available here. 

Emerging market regions, in particular Latin America (10 percent), are currently 

under-represented in terms of private equity allocation, however, there are signs of greater 

interest given the higher predicted returns from these regions than those expected from 

developed regions. 


Strategy Allocation 

n 

22% 

Buyout 

n 

13% 

Fund of Funds 

n 

n 

n 

n 

n 

n 

1% 

5% 

2% 

5% 

12% 

4% 

Generalist 

Infrastructure 

Mid-Market 

Mezzanine 

Other 

Secondaries 

institutional 

investor 

sentiment 

survey 

n 

8% 

Turnaround 

n 

29% 

Venture 


Venture capital funds, accounting for 29 percent of LP allocation, is the preffered strategy 

and is followed by buyout funds which represent 22 percent of LPs’ allocation. Fund of 

funds also remain a popular choice given the wide exposure provided. Generalist and 

mid-market funds are amongst the least popular with one percent and two percent 

allocation, respectively. 

Sector Allocation 

foreword 


• allocation 

fees 



and concerns 


fundraising 

n 

12% 

Biotech/Life Sciences 

n 

9% 

CleanTech/Renewables 

n 

12% 

Energy/Oil & Gas 

n 

8% 

Financial Services 

n 

3% 

Leisure/Entertainment 

n 

6% 

Manufacturing 

n 

3% 

Natural Resources 

n 

14% 

Non Sector Specific 

n 

11% 

Other 

n 

6% 

Retail 


n 

n 

7% 

11% 

Transport 

TMT 

Funds targeting a diverse range of sectors are the most popular choice for LPs investing 

in private equity, with 14 percent of LPs currently allocating capital to non-sector specific 

funds. LPs with a more specific sector target favour biotech/life science (12 percent) and 

energy (12 percent) funds. The least popular sectors include the leisure (three percent) 

and retail (six percent) sectors, a trend likely to be driven by the fall in consumer demand. 

page 7 


Over the 

long-term, 

private 

equity 

provides the 

higher riskadjusted 

return 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

• 

Does your institution plan to increase its allocation to 

private equity in 2012? 

fees 



and concerns 

n 

n 

n 

32% 

54% 

14% 

Yes 

No 

Not sure 


fundraising 


page 8 

Over half of surveyed respondents stated that they had no plans to increase their allocation 

to private equity beyond current levels. In total, 54 percent of LPs were content with 

their current allocation, reinforcing the belief among fund managers that fundraising has 

become increasingly challenging. Simultaneously, 32 percent of all respondents said they 

were planning to increase their private equity allocation in 2012 for a number of different 

reasons. Of this group, just over a third of LPs expected the private equity industry 

to generate better or more predictable returns in 2012. This view is consistent with the 

general outlook private equity is facing following a turbulent few years. The remainder 

of the respondents said they were unsure as to whether their private equity allocation 

would increase in 2012. The difficulty in finding experienced managers with good track 

records continues to be a stumbling block for LPs, particularly for investors looking to 

emerging markets as a potential destination for their capital. 


How many private equity funds does your institution invest in? 

% 

35 

30 

25 

20 

15 

10 

5 

0 

Over 100 

funds 

50 to 

99 funds 


25 to 

49 funds 

Fewer 

than 25 funds 

institutional 

investor 

sentiment 

survey 

Most LPs invest in fewer than 25 funds but the percentage of LPs which invest in over 

100 funds is only marginally less. A lack of fund commitments can simply be explained 

by the slowdown in private equity activity witnessed in both 2010 and 2011. Whilst both 

years compared favourably to 2009, the number of private equity deals and fundraising 

activity is well short of the soaring figures witnessed pre-financial crisis. Conversely, 

external factors such as the European sovereign-debt crisis and uncertain macroeconomic 

factors have led to a difficult and anaemic exit market for the industry; ensuring fund 

commitments remain active for a significant number of LPs. 

Is the number of private equity funds you invest in... 

foreword 


• allocation 

fees 



and concerns 


fundraising 

n 

40% 

Optimal, no plans to change 

n 

34% 

Too many, I plan to reduce the 

number of relationships we have 

n 

26% 

Too few, I am looking to invest in 

new managers 


The majority of LPs indicated that they have reached an optimal number of fund commitments 

and have no further plans to change this. In addition, 34 percent of respondents 

said that they are planning to reduce their number of fund commitments. Simultaneously, 

just over a quarter of all LPs surveyed stated that they are looking to invest with 

new fund managers. This is not overly surprising, given that the economic downturn has 

adversely hit investor confidence. 

page 9 


Co-investments 

provide LPs 

with greater 

transparency 

and increased 

flexibility 

institutional 

investor 

sentiment 

survey 

foreword 

Which of the following private equity vehicles does your institution 

invest or participate in/would consider investing or participating in? 


% 

allocation 

• 

100 

n 

n 

Co-investments 

Separate accounts 

fees 

80 

n 

n 

Funds of funds 

Secondaries 


60 

n 

n 

First-time managers 

None of these 


and concerns 

40 


fundraising 

20 

0 

Does your institution 

invest or participate in 

Would consider investing 

or participating in 


page 10 

Compared to the number of institutions currently committed to investing in secondaries 

funds, the appetite for future investments in secondaries is remarkably low. Of all the 

vehicles which were available to LPs, co-investments were the most popular choice as 

they provide LPs with greater transparency in deals and increased flexibility with their 

capital. As the private equity industry is becoming more and more concerned with the 

level of information transparency between LPs and GPs, investors are looking for ways to 

have a higher level of governance with their own investments. The recent introduction of 

standardised reporting practices by the Institutional Limited Partners Association (ILPA) 

illustrates the importance of reporting in an industry which is still recovering following 

the global financial crisis. With LP confidence remaining low, there is a high demand for 

heavily tailored specialist investment vehicles despite a greater appetite for first time 

managers than for separate accounts. 


fees 

institutional 

investor 

sentiment 

survey 

Should management fees be reduced after a fund’s investment 

period has concluded? 

n 90% Yes 

n 10% No 

foreword 


allocation 

• fees 



and concerns 


fundraising 


Unsurprisingly, a vast majority of LPs (90 percent) believe that management fees should 

be reduced following the conclusion of a fund’s investment period. Management fees are 

intended for fund managers to cover their overhead and salary costs, generally in the range 

of 1.5 to 2.5 percent of the fund’s committed capital per annum, and are expected to be 

scaled down in the later years of a fund’s life. Many small and mid-market firms require 

management fees in order to support their deal teams while larger private equity firms 

justify their fees due to sourcing deals globally with an office presence across different 

regions. In addition, some brand-name firms state that their exceptional performance 

justifies a premium over market-rate fees. However, ILPA argues that “management fees 

should be based on reasonable salaries, as excessive fees create misalignment of interest”. 

Many fund managers are unable to afford operating with lower management fees and 

rather than lower their fee, choose to negotiate other concessions in order to entice LPs 

to invest with them. 

page 11 


Fee breaks 

should be 

negotiated 

dependent 

upon fee level, 

size of fund and 

whether the 

fund is in high 

demand 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 

• 


Should your institution receive a fee break as an early 

investor in a fund? 


and concerns 

n 

n 

64% 

36% 

Yes 

No 


fundraising 


page 12 

As a concession to growing LP demands, GPs are offering an ‘early-bird special’ on management 

fees to LPs who commit before a first close. 64 percent of LP respondents believe 

that they should receive a fee break as an early investor in a fund. For those that believe 

there should be a fee break, the optimal level of discount varied from 10 percent to 25 

percent and some concluded that a fee break should be ‘negotiated between the parties’ 

or ‘fees should start at closing of capital-raising or when 50 percent of investment has 

been achieved’. However, fund managers risk alienating investors who are known to be 

unable to commit early to a fund. Recognising this, 36 percent of LPs have responded 

that they do not believe their institution should receive a fee break if they are an early 

investor in a fund. 


What level of management fee should be realistically charged by 

fund managers when your institution generally considers making an 

investment in a private equity fund? 

institutional 

investor 

sentiment 

survey 

% 

40 

35 

30 

foreword 


allocation 

25 

20 

15 

10 

5 

0 

2% 1.75% 1.5% 1.25% 1% Less than 

1% 

• fees 



and concerns 


fundraising 


In order for institutional investors to consider making an investment in a private equity 

fund, 36 percent of respondents believe that the realistic level of management fees charged 

should be 1.5 percent. This was followed by 21 percent responding that two percent should 

be charged and 15 percent believing that one percent would be realistic. Management 

fees are important to LPs as there may be a misalignment of interests between parties 

and higher management fees may lead to GPs earning their income through fees rather 

than carry. There is a growing concern amongst LPs, particularly from pension funds, 

that they are paying too much in management fees while funds do not perform favourably. 

For example, the New York State Common Retirement Fund has reviewed its portfolio 

and concluded that fees paid to investment managers have increased 163 percent over 

the past five years despite a period when the fund had a net negative return bringing 

the question of management fees paid by pension funds into public debate. However, 

the study has been criticised for failing to realise that management fees often rise with 

increases in assets under management rather than aligning with overall investment results. 

page 13 


Fees should 

be calculated 

in connection 

with costs to 

keep them 

lower for LPs 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 

• 

Are higher-than-preferred management fees and carried interest 

sufficient reasons to deter your institution from investing in a private 

equity fund? 

Yes 



and concerns 


fundraising 

No 

Sometimes but 

depends on the 

fund manager 

% 


page 14 

When asked if higher-than-preferred management fees and carried interest are sufficient 

reasons to deter an institution from investing in a private equity fund, 49 percent of surveyed 

LPs responded ‘sometimes but depends on the fund manager.’ Simultaneously, 38 

percent of respondents believe that higher-than-preferred management fees and carried 

interest are a reason to forgo investment while only 13 percent do not believe that is 

the case. George Sudarskis, founder of Sudarskis & Partners, criticised management fees 

that are calculated as a percentage of commitments and suggested that a more suitable 

arrangement would be for fees to be calculated in connection with costs as a way to keep 

them lower for LPs. In an attempt to avoid high management fees and carried interest, 

many LPs are moving towards co-investments as most pay no fees or carry to the sponsor. 

On average, co-investment saves an LP between 40 and 50 percent of their invested 

capital while simultaneously providing an efficient vehicle for capital allocation. 


The optimum 

hurdle rate 

should equate 

to a risk-free rate 

of return 

institutional 

investor 

sentiment 

survey 

foreword 

Is the standard eight percent preferred return/optimum 

hurdle rate correct? 

Just right – If it ain’t 

broke, don’t fix it 

Too low 


allocation 

• fees 



and concerns 


fundraising 

Too high 

% 


69 percent of global LPs believe that the standard preferred return/optimum hurdle rate 

is just right. In the words of some institutional investors, “the problem is not the hurdle, 

it is the catch-up” and that the hurdle rate “should be viewed like an index that changes 

with market conditions.” Simultaneously, nearly 25 percent of survey respondents believe 

that the eight percent preferred return is too low as the “risk/return between parties 

to the transactions is not in balance” and “managers are taking too much.” Global LPs 

also have a view that the eight percent hurdle rate is based upon the western model of 

private equity and in emerging markets can be viewed as too low given that these returns 

are possible with lower risk in more liquid debt products. Few LPs believe that eight 

percent is too high with one LP responding that “the market is moving to seven percent.” 

page 15 


LPs are 

requesting a 

“Europeanstyle” 

waterfall 

distribution 

structure 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 

• 



and concerns 


fundraising 

What is your institution’s preferred method of carry/carried interest? 

Deal-by-deal 

Whole fund 

No preference 

% 


page 16 

The vast majority of surveyed LPs (86 percent) prefer carried interest applied to the 

whole fund as opposed to a deal-by-deal basis. Increasingly, LPs are requesting for GPs 

to setup “European-style” waterfall distribution structures which entail LPs being paid 

all of their committed capital, plus a preferred return, before the GP begins to collect 

carried interest. The “European-style” distribution scheme has been endorsed by ILPA 

as the preferred structure for carried interest. Over the recent period of harsh fundraising 

conditions, many GPs are acquiescing to LP demands with GSO Capital Partners 

collecting carried interest only after LPs are paid back 75 percent of committed capital 

plus an 8 percent preferred return. CS Strategic Partners V goes one step further with a 

distribution scheme which not only includes all committed capital, but also all fees and 

fund expenses plus the 8 percent preferred return, before collecting carried interest. 


Many LPs 

want fund 

managers 

to use any 

transaction 

fees to offset 

management 

fees 

institutional 

investor 

sentiment 

survey 

foreword 

What percentage of the fees charged to a portfolio company 

investment by a fund manager should be rebated to an investor? 

% 

80 

70 

60 

50 

40 

30 


allocation 

• fees 



and concerns 


fundraising 

20 

10 

0 

50% 60% 70% 80% 90% 100% 


When asked which percentage of the fees charged to a portfolio company investment 

by a fund manager should be rebated to an investor, 67 percent of LPs responded that 

the whole fee should be rebated. For the past few years LPs have been demanding that 

a fund manager uses 100 percent of any transaction fees to offset the management fees. 

Some GPs have begun to offer LP-friendly terms; however, as there is more pressure 

for management fees to be lowered, some firms have attempted to compensate through 

increasing fees on their portfolio companies in order to maintain their income levels. As 

investors demand a larger rebate, GPs have an incentive to charge higher deal fees, running 

the risk of alienating the management team of portfolio companies. 

page 17 


GP fund 

commitments 

should be a 

meaningful 

percentage of the 

manager’s net worth 

institutional 

investor 

sentiment 

survey 

Based on your fund investment(s), what is the optimum level of GP 

commitment in a fund? 

foreword 


allocation 

fees 

• 

% 

40 

35 

30 

25 



and concerns 


fundraising 

20 

15 

10 

5 

0 

Less 

than 2% 

3% 4% 5% 5% to 

10% 

More 

than 10% 


page 18 

When asked what the optimal level of GP commitment to a fund is, 39 percent of 

institutional investors responded between five and 10 percent. However, many believe 

that there is no optimal level and that GP commitments are highly dependent upon the 

fund size, longevity of the firm and GP economic situation. One LP responded that “it is 

not the absolute percentage that matters but rather the proportion of a GPs’ net worth 

as the key metric.’ If GPs are reluctant to make a substantial investment in their fund, 

LPs become weary and may choose not to invest. Historically, GPs have committed an 

average of five percent to a fund; however, with the implementation of the US Dodd- 

Frank financial reform rules, some financial institutions have committed three percent 

or lower as the Volcker rule restricts banks from investing more than three percent of 

their Tier 1 capital in propriety trading including private equity. On the other hand, if 

GPs make too large a commitment to their fund, LPs become concerned that a manager 

may become overly risk-averse. 


Focus on… 

Sovereign Wealth Funds 

Distribution of Sovereign Wealth Funds by Region 


12 

10 

8 

6 

4 

2 

institutional 

investor 

sentiment 

survey 

foreword 

0 

Asia- 

Pacific 

CEE 

Latin 

America 

MEA 

North 


Europe 


allocation 


Despite uncertainty in global markets, Sovereign Wealth Funds (SWFs) have continued to 

accumulate assets and increase in size, in part through shrewd investments in funds and 

other investment opportunities. SWFs are also key players in the private equity industry, 

a number of who have allocated billions of dollars to private equity funds. 

Examples include the Korea Investment Corporation who has invested $2 billion in 

the asset class over the past four years and China Investment Corporation who, following 

much activity in the past few years, has managed to increase their private equity allocation 

to 21 percent of total assets. In the Middle East, the Abu Dhabi Investment Authority, 

with over $600 billion in assets under management is one of the largest private equity 

investors in the world. 

Buyout funds are the most popular choice for SWFs investing in private equity, with 49 

percent of all commitments in the asset class utilising this fund strategy. This is followed 

by venture capital, which represents 28 percent of commitments. Distressed and mezzanine 

funds are less popular, representing just four percent and three percent respectively. 

Although some SWFs invest primarily within their own region, with the aim of rejuvenating 

their local industries, some are looking towards other regions for investment, 

especially to chase higher returns available in those regions. North America remains the 

most popular investment target for SWFs, with 28 percent of allocations to funds targeting 

this region. Global funds account for 28 percent of fund commitments whilst emerging 

regions such as Latin America and Central & Eastern Europe remain the least popular 

investment targets, with a total of just two percent of commitments going to funds targeting 

those regions, collectively. 

fees 



and concerns 


fundraising 

page 19 


SWFs prefer to 

target sectors 

which provide 

steady long-term 

returns 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 



and concerns 


fundraising 

page 20 

Asia is of particular interest for a number of SWFs, especially those in the Middle 

East where, in recent years, there has been an increase in allocation to the region, and in 

particular China. At present, SWF commitments to funds targeting Asia-Pacific account 

for 13 percent of all fund commitments, falling short of the 16 percent which is currently 

allocated to funds targeting Western Europe. 

Key sectors which are of interest to SWFs include healthcare, TMT, clean-tech, biotech 

and energy. It is clear that SWFs are keen to target sectors which will provide steady, 

long term returns rather than sectors which may yield higher returns but with a greater 

associated risk. Due to the long term outlook of SWFs, their investments are less likely 

to chase after the highest returns possible, rather focusing on bringing long term profit 

to the fund. 

The emergence of new SWFs in the asset class is a key area of interest for GPs in 2012. 

Whilst SWFs are one of the most active institution types in the industry, there is still a 

lot of untapped capital being held by more cautious funds that have not yet entered the 

asset class. One notable example is the Norwegian Government Pension Fund Global, the 

second largest SWF in the world with over $500 billion in assets. The Fund has, to date, 

invested in a number of real estate assets, however, it has not yet entered the PE asset class. 

There are high expectations that they will do so in the near future and with the sizeable 

assets they manage, even a small allocation to the asset class would provide a huge boost 

for GPs currently raising funds. In addition, a number of governments, especially those 

in emerging markets, are considering launching their own SWFs, which will bring more 

capital to the asset class. 


LP-GP 

Relationship 

Does your institution insist on a key-man clause when 

investing in a private equity fund? 

institutional 

investor 

sentiment 

survey 

n 

n 

n 

69% 

4% 

27% 

Always 

Never 

Sometimes but depends on the 

fund manager 

foreword 


allocation 


69 percent of LP respondents always have a key-man clause when investing in a private 

equity fund. They believe that a policy framework surrounding issues, such as key 

executives’ succession, is paramount when making fund investments. Conversely, there 

is a very small minority (four percent) of respondents who never use a key-man clause 

when investing in private equity. Almost 30 percent of respondents invest using a keyman 

clause to a varying degree depending on the fund manager. This may be because the 

investor has used the fund manager on a previous occasion and a key-man clause is not 

necessary. Alternatively the investor may categorise the fund manager’s capabilities with 

several executives and not just key personnel. 

A key-man clause can vary slightly from fund to fund on policy details. However, if 

implemented, it will always lead to a temporary suspension of the fund from making 

further investments. Some specify no new investments if there are key personnel changes, 

while other clauses can be enacted if a number of key named executives cease to devote a 

certain amount of time into the partnership. In July 2011, the departure of two managing 

directors from Aria Capital triggered a key-man clause and the French fund manager was 

unable to make new investments until suitable replacements were found. The significance 

of the use of a key-man clause demonstrates the importance investors place on key players 

within the firm to generate sufficient returns on the fund. 

fees 

• lp – gp relationship 


and concerns 


fundraising 

page 21 


institutional 

investor 

sentiment 

survey 

How is the level of GP communication and reporting? 

foreword 

n 

5% 

Excellent 


n 

60% 

Satisfactory 

allocation 

n 

2% 

Too much, too detailed 

fees 


• 

n 

32% 

There is much room for 

improvement 


and concerns 


fundraising 


n 

1% 

The GP’s phone line is 

disconnected and my e-mails 

bounce except when fundraising 

page 22 

Only five percent of institutional respondents felt that the communication and reporting 

methods used by GPs were excellent while approximately one-third felt there was 

much room for improvement. LPs believe there is room for improvement due to ‘not 

all managers report according to certain levels of transparency’, ‘not enough detail on 

each call and distribution’, ‘more detail needed on portfolio and performance data’ and 

finally ‘delayed reports and insufficient details on deal flows’. It is important to note that 

60 percent of respondents find GP reporting methods to be satisfactory and, although 

there is room for improvement, this is not to say that current processes are not adequate. 

ILPA has addressed issues of GP reporting best practices and they recommend that capital 

calls and distributions should provide information consistent with the ILPA Standardised 

Reporting Format. It also states that GPs should provide quarterly projections on capital 

calls and distributions. This should lead to more uniformity in the information streams LPs 

receive from their fund managers. Currently the frequency and content of GP reporting 

is dependent on the fund’s individual governing policy. ILPA suggests that the LP could 

use the standardised reporting templates if they have specific reporting requirements and 

request additional commitments from the GP in a side letter. 


Investors place 

a high emphasis 

on due diligence 

and regular 

reporting 

institutional 

investor 

sentiment 

survey 

Which processes are important when conducting due diligence? 

% 

100 

foreword 


80 

allocation 

60 

40 

20 

0 

Pay a visit 

to the GP’s 

office(s) 

Speak with 

C-level 

professionals, 

including 

finance, 

operations, 

administrative 

Speak 

with deal 

professionals 

Speak 

with junior 

professionals 

at the GP 

fees 



and concerns 


fundraising 


As part of the due diligence process, 93 percent of survey respondents speak directly with 

the deal professionals and 87 percent visit the GP at their office. LPs place value on speaking 

with the key personnel in the deal process and communicating with them directly and 

face-to-face. In addition, 68 percent of respondents stated that they spoke with junior professionals 

at the GP and 71 percent of respondents spoke to C-Level professionals at the GP 

as they have knowledge of key data despite not being accountable for the fund. Overall the 

responses illustrate the high emphasis investors place on due diligence and regular reporting. 

There are many varied methods of due diligence, however regular reporting, meetings with 

key personnel at the GP and advisory boards as well as assessing the viability of portfolios, 

performance and processes are all an important part of the process. 

page 23 


A vast 

majority of 

LPs conduct 

due diligence 

on the compliance 

operations of GPs 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 


• 

Does your institution conduct due diligence on the 

compliance operations of a fund manager? 


and concerns 

n 

n 

n 

45% 

43% 

12% 

Yes, extensively 

Yes, minimally 

No 


fundraising 


page 24 

The vast majority of investors conduct due diligence on the compliance operations of fund 

managers, whether extensively or to a minimal extent. Altogether 88 percent of LPs stated 

that they undertake this process with GPs versus the 12 percent of respondents who did 

not. There are a similar proportion of investors who recognise compliance extensively as 

well as those who investigate this to a minimal extent. A good compliance program includes 

developing policies and procedures designed to prevent violations of securities law, creating 

a code of ethics, maintaining records of these policies, conducting an annual review of 

these procedures and even appointing a Chief Compliance Officer. It is clear that regulatory 

developments, including the introduction of the Dodd-Frank Act in the US, have had 

a profound effect on private equity fund managers both directly and indirectly. 


Which processes are important when conducting due diligence? 

% 

80 

institutional 

investor 

sentiment 

survey 

70 

60 

foreword 

50 

40 

30 


allocation 

20 

fees 

10 

0 

More personal 

phone calls 

By providing 

more detail 

on the fund’s 

structure and 

investment 

focus 

By insisting 

senior 

investment 

managers 

and/or 

partners 

communicate 

with limited 

partners 

By tailoring 

investor 

request to 

individual 

investor 

requests 



and concerns 


fundraising 


When asked about ways that GPs could improve their communication with investors during 

the fundraising process, 69 percent of respondents insist that senior investment managers/ 

partners should communicate more with LPs. Simultaneously, 63 percent of investors want 

GPs to provide more detail on their fund’s structure and investment focus. 53 percent want 

more tailored feedback from GPs and 29 percent of investors simply want more phone 

calls with their fiduciaries. Investors tend to have a negative sentiment towards their GPs 

when they are not in regular contact and the information investors receive may not always 

meet their requirements. Transparency and support are now some of the main factors that 

investors look for in a fund manager and the issue is also being recognised by firms. Some 

fund managers believe that investors want greater communication and also see it as being 

in their best interest to be open with their investors. This is for the sake of financing future 

transactions, as they believe that investors who place trust in their GPs through strong 

relationships are more likely to do so. 

page 25 


There is room 

for improvement 

with the quality 

of information 

freely offered 

by GPs while 

fundraising 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

Are you generally happy with the quality of information freely 

offered by the GP during fundraising? 

% 

80 

70 

60 

fees 


• 


and concerns 


fundraising 

50 

40 

30 

20 

10 

0 

All of the time Most of the time Some of the time 


page 26 

When investors were asked if they were happy with the quality of the information that 

was freely offered to them by GPs during their fundraising efforts, the results were positive, 

with 73 percent saying that they were happy most of the time with the information 

and 24 percent saying that they were happy some of the time. Three percent of investors 

were happy all of the time with the information and no investors said that they had never 

been happy with it. This is to be expected, as during the fundraising process, it is in the 

interest of GPs to sell themselves and provide the most attractive information to potential 

investors. However, there is room for improvement in terms of the quality provided by 

GPs, with just over a fifth of investors revealing that they have been happy only some of the 

time. With 76 percent of investors happy at least most of the time with the information 

provided to them, the way GPs organise their fundraising processes does not need to be 

radically reorganised for the purpose of providing information of a greater quality, but may 

require some smaller modifications. 


If you have worked with a placement agent in any of the private 

equity funds in which you have invested over the last two years, how 

would you rate the experience in terms of service quality and the 

agent’s ability to aid the fundraising process to completion? 

% 

80 

70 

60 

50 

40 

30 

20 

10 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 



and concerns 

0 

Very satisfied 

Generally 

satisfied 

Sometimes 

unsatisfied 

Generally 

unsatisfied 


fundraising 


When asked about their experience with placement agents over the last two years, the 

majority of investors were somewhat satisfied with the quality of service they provided in 

helping the fundraising process. 61 percent of investors were generally satisfied, whilst a 

meagre four percent were very satisfied. 22 percent of investors were sometimes unsatisfied 

with the service of placement agents and 13 percent were generally unsatisfied. Although 

the majority of investors were positive on the quality of their placement agents, there is still 

a significant amount that is not satisfied with the service provided. Recently, the integrity 

of placement agents has been called into question. In April 2012, a former board member 

of the CalPERS pension fund that later went on to become a placement agent, coerced 

Apollo Global Management into paying him fees for fundraising work he claimed had been 

approved by CalPERS. Apollo requires this approval by rule and CalPERS did not approve 

the fundraising. Perhaps more severe, one Asian fund manager referred to placement agents 

as ‘leeches’ and that LPs generally would rather deal with GPs directly. 

page 27 


Focus on… Endowments 

Distribution of Endowments by Region 

600 

500 

institutional 

investor 

sentiment 

survey 


400 

300 

200 

100 

0 

Asia- 

Pacific 

CEE 

Latin 

America 

MEA 

North 


Europe 


foreword 


allocation 

fees 



and concerns 


fundraising 

page 28 

Endowments can be non-profit organisations or institutions such as universities. Larger 

university endowments in the US invest a greater proportion of their portfolio into 

alternative assets including private equity. Within the past two decades, Harvard and Yale 

University has been leaders in multi-asset class diversified investing. However they both 

witnessed a decline in their assets since the financial crisis of 2008 

As of February 2012, the fastest growing US university endowment was the University 

of Virginia with a 28 percent increase in its endowment over the past fiscal year. University 

of Pittsburgh ranks second at 24 percent, followed by Purdue University. Both the 

University of Virginia and University of Pittsburgh invest a fifth of their portfolio into 

private equity globally and across diversified fund types. The Purdue University endowment 

is a similar size to the University of Pittsburgh however it allocates only 10 percent 

of its assets in private equity. Investments are focused on buyout and venture capital funds 

in the United States, not made regularly and are targeted with fund managers with a 

proven track record. 

University endowments in Canada invest between five and 13 percent of their assets in 

private equity. The University of British Columbia Endowment allocates the most money 

in the asset class at CAD120.45 million (13 percent of total assets), however, the endowment 

reduces risk by not fully investing in emerging markets, choosing to focus on North 

America, Europe and Asia instead. UK university endowments invest a distribution of 

between three and eight percent into private equity. The Oxford University Endowment 

Management invests eight percent into the asset class with a value of over £66 million. 

Although the Oxford University endowment invests globally, university endowments in 

the UK are more likely to invest in specific funds within the regions of North America, 

Europe and Asia. 

It is clear that the United States is leading the way with multi-asset class investing 

in their university endowments. Canadian universities endowments are accelerating the 

amount but not frequency of their private equity; however, UK university endowments 

remain cautious of their levels of private equity investment. 


Future 

Investments 

and 

Concerns 

Current LP Appetite Snapshot 

Geographic Appetite 

% 

30 

25 

20 

15 

10 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 


• future investments 

and concerns 

5 

0 

Asia- 

Pacific 

CEE 

Latin 

America 


Middle 

East/ 

Africa 

North 

America 

Western 

Europe 


fundraising 

According to data from Private Equity International, LPs are keen to continue investing in 

developed markets in Western Europe (22 percent) and North America (27 percent) which 

are still the most popular choice for private equity investment. There is also appetite for 

emerging markets, such as Central and Eastern Europe and Middle East/Africa, which are 

likely to continue gaining popularity amongst investors in years to come. With uncertainty 

in global markets and sovereign debt crises plaguing developed nations, the risk associated 

with emerging markets is becoming less of an issue, particularly given the higher expected 

returns on offer. Latin America has seen a slight decline in interest, with nine percent of 

LPs expressing an appetite for the region, compared to the 10 percent who have currently 

allocated capital there. There are fears amongst some LPs of overheating economies which 

are leading to more cautious LP decision making, where the risk of instability is in some cases 

outweighing any additional returns which would be gained from such regions. 

page 29 


Strategy Appetite 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 



• 

and concerns 


fundraising 


LP appetite for various fund strategies shows that although venture capital and buyout 

funds remain popular with private equity investors, when compared to LP allocation there 

is a slight decline in interest for these strategies in favour of others such as secondaries 

and mezzanine investments. Such preferences reflect the on-going difficulties faced by 

the industry in the wake of the financial crisis. Following an increasing interest in the 

purchase of secondary fund in 2011, the market has continued to gain momentum with 

many LPs committing to secondaries funds, in addition to selling their own existing fund 

interests on the secondaries market. In addition, a number of LPs are keen to reduce the 

number of GP relationships they maintain, without reducing their allocation to the asset 

class. Mezzanine funds are also garnering increased interest, in particular following the 

slow recovery in the debt market which traditionally supports the kind of deals carried 

out from buyout funds. 

Sector Appetite 


n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

n 

20% 

11% 

3% 

4% 

2% 

9% 

10% 

6% 

8% 

26% 

11% 

7% 

11% 

6% 

2% 

4% 

3% 

25% 

5% 

4% 

5% 

18% 

Buyout 

Fund of Funds 

Generalist 

Infrastructure 

Mid-Market 

Mezzanine 

Other 

Secondaries 

Turnaround 

Venture 

Biotech/Life Sciences 

CleanTech/Renewables 

Energy/Oil & Gas 

Financial Services 

Leisure/Entertainment 

Manufacturing 

Natural Resources 

Non Sector Specific 

Other 

Retail 

Transport 

TMT 

page 30 

LPs continue to back preferred funds which have a wider target, with a quarter of LPs 

specifying “no sector preference” as a future sector strategy. Another notable trend is 

the increase in interest in TMT, which in uncertain times is seen as a ‘safe’ investment 

opportunity. At present, 11 percent of LPs have allocated capital to a fund investing in 

TMT, however, 18 percent plan to invest in the sector in the near future. 


LPs question 

the value 

of using a 

placement 

agent 

institutional 

investor 

sentiment 

survey 

For any upcoming fundraisings, would you have a preference about 

working with a placement agent? 

foreword 


Would happily work with a 

placement agent 

Depends on 

the placement agent 

Would prefer to deal directly 

with the general partner 

% 

allocation 

fees 


• 


and concerns 


fundraising 


Only 14 percent of investors would happily work with a placement agent. 40 percent of 

investors said that their decision would depend on the placement agent themselves, whilst 

46 percent would prefer to deal directly with a GP and ignore the placement agent. The 

fact that a large number of respondents said that it would depend on the actual placement 

agents’ character, reveals that grievances have been established due to the value 

and effectiveness of some placement agent’s efforts. It is not the inherent nature of using 

a placement agent but rather the quality of them in recent times that has created poor 

investor sentiment towards them. 

Usage of placement agents for European buyouts has risen by 15 percent between 

2007 and 2011, but firms are looking to reduce their usage and instead develop their own 

in house teams. As the data suggests, the persona of the placement agent is important in 

deciding whether investors would use them. As the fee rate is an important component 

of the agent, the future may see a downward pressure on the fees of placement agents. 

page 31 


institutional 

investor 

sentiment 

survey 

Are you considering setting up a separate account with 

a preferred GP? 

foreword 

I already have 


allocation 

Yes, in the next few years 

fees 



• 

and concerns 


fundraising 

page 32 

No 


One-third of respondents has either set up a separate account already or are looking 

to do so over the next few years. 66 percent of respondents, however, do not have any 

plans to set up any such arrangement with a GP. Although separate accounts have been 

established for a while, there have recently been a number of large deals in the industry 

with pension funds, such as Texas Teachers’ Retirement System and New Jersey Division 

of Investment setting up multibillion dollar accounts with notable private equity firms 

such as KKR and Blackstone Partners. 

Those survey participants who are not looking to set up a separate account in the 

coming years cited size as a deciding factor in their choice. Large pension funds have much 

to gain from separate accounts, including lower fees, greater control over investments 

and preferred returns. For instance, the New Jersey Division of Investment expects to 

save over $100 million in management fees through their separate account with Blackstone. 

However, for smaller LPs who do not have the assets necessary to set up such an 

arrangement, separate accounts are a cause for concern. Smaller LPs worry about the 

balance of responsibility between a GP’s core funds and their separate account mandates. 

There is also unease about how GPs will distribute investment opportunities amongst 

their funds and separate accounts. 

% 


The majority 

of LPs have 

received a fund 

managers’ 

request for a 

fund extension 

In the past year, has your institution has been approached by fund 

managers asking for a fund extension? 

n 16% 

n 26% 

n 21% 

n 21% 

n 15% 

Yes, over 20% 

Yes, between 10% and 20% 

Yes, between 5% and 10% 

Yes, less than 5% 

No 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 


An overwhelming 85 percent of survey respondents have had a request from at least one 

of their fund managers for a fund extension over the past year, with 42 percent of LPs 

having been approached by more than 10 percent of their fund managers for an extension 

on the original fund terms. 

Uncertainty in global markets has created a hostile investment environment for GPs 

looking to acquire assets. With less attractive opportunities available for fund managers 

and tougher exit environments for existing acquisitions, LPs are finding it difficult to 

gain the best return on their investment. This is especially true for funds raised prefinancial 

crisis. In what was an optimistic fundraising and investment environment, a 

high number of mega-funds were launched leading to billions of dollars being raised 

and managed by several fund managers. Following the financial crisis, this capital failed 

to be deployed as had been planned. 

Earlier this year, Morgan Stanley approached investors with a proposal for a 12 to 18 

month extension, as less than half the capital raised for their fund had been deployed. 

More recently, Trilantic Capital Partners and Gresham Private Equity became the latest 

European buyout firms to seek an extension on their funds, in order to invest all the 

capital raised. Although LPs are consulted on extending fund periods, it is difficult for 

them to decide against it as they need to retain GPs in order to manage their assets. 

However, LPs remain sceptical that fund extensions are the only option available and 

remain unconvinced that the action is taken for the LPs’ best interests. 


• 


and concerns 


fundraising 

page 33 


The prevalence 

of zombie funds 

has increased 

drastically in 

recent years 

institutional 

investor 

sentiment 

survey 

foreword 

Are ‘zombie’ funds a concern at your institution? 


n 

n 

n 

26% 

54% 

20% 

Very concerned 

Somewhat concerned 

Not concerned 

allocation 

fees 



• 

and concerns 


fundraising 


page 34 

With the number of zombie funds growing in recent years, it is not surprising that 80 

percent of LP respondents expressed concerns about the zombie funds in their investment 

portfolios, of which 26 percent were incredibly concerned. Zombie funds are the 

result of fund extension requests from managers who do not have the capacity to launch 

a new fund and are underperforming on their existing portfolio. With poorly performing 

assets and a poor fundraising environment, the prevalence of zombie funds has increased 

drastically with more LPs currently weighed down with such underperforming funds in 

their portfolios. These are affecting both small and large LPs, with major public pension 

funds finding it harder to keep a track of all such funds in their vast portfolios. 

Zombie funds are often seen as the first step towards a GP winding down, although 

many firms are often able to stay open by relying on management fees coming through 

from earlier deals. However, LPs who end up paying these fees for a longer period find 

their investment returns are diluted in the long term. Such issues have encouraged LPs 

to increase their communication with other investors in funds in order to improve their 

knowledge and negotiating power. 


What are your top concerns for private equity in 2012? 

% 

80 

70 

60 

50 

40 

30 

20 

10 

0 

The effect 

Mitt Romney’s 

presidential 

candidacy 

in the US 

will have on 

private equity 

European 

crisis 

The slow Emerging 

recovery in the market 

debt market returns are 

not what they 

are purported 

to be 

Private equity 

shakeout 

Zombie funds 

institutional 

investor 

sentiment 

survey 

foreword 



allocation 

LPs who are active in the alternative asset class are concerned with a number of issues, of 

which the most common concern is the current political and economic turmoil faced by 

many European countries. Aside from increasing the risk associated with investments in 

the region, the instability of the Euro is also putting off investment in the region. US-based 

LPs are now seeking parallel dollar funds from European GPs raising Euro-denominated 

funds, in order to avoid the risk associated with the Euro. However, despite the higher 

risk now prevalent in European investments, the region is also full of opportunity due to 

assets being sold at lower prices by debt-laden companies and economies. 

A private equity shakeout as a result of poor recovery in debt markets and political 

and economic instability is also a key concern, with over one-third of respondents citing 

this as a key concern. The lack of cheap debt available to fund managers is making buyout 

deals less appealing due to reduced returns on investment. There is also a widening gap 

in the industry between those large, well known firms who are able to succeed in raising 

multi-billion dollar funds due to their reputation amongst LPs, whilst smaller, lesser 

known firms are struggling to raise much smaller funds. 

Disappointing returns from investments in emerging markets are a worry for almost 

one third of those surveyed. Predictions of over-heating economies in emerging market 

regions are just one reason for lower returns than previously expected by both GPs 

and LPs. 

In the US, the presidential campaign, and in particular Mitt Romney’s private equity 

background, is cause for concern for 15 percent of respondents. Whilst it is unlikely 

that the presidential campaign will have a direct impact on private equity, the industry 

is being closely scrutinised, in particular against allegations of unfair taxation for private 

equity firms. The SEC is in the process of toughening up the governance of PE firms and 

fees 


• future investments 

and concerns 


fundraising 

page 35 


Private equity is 

coming under 

increased 

scrutiny 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 



• 

and concerns 


fundraising 

page 36 

ensuring improved reporting standards. In addition, a number of states are reconsidering 

their pension funds’ involvement in the asset class, with some even calling for public 

pension funds to pull out of the asset class altogether. 

A combination of events has culminated in a perfect storm which may lead to a shakeout 

in the industry. A number of issues which are likely to have a major impact on the industry 

in 2012 include: 

1. The rise of separate accounts – many major US pension funds have already taken action 

and set up separate accounts with well-known GPs, with many more following suit by 

preparing proposals for board approval. There is a general focus on more customised 

investment solutions, such as co-investments, which not only allow greater control 

over portfolio acquisitions, but also give LPs greater exposure and negotiating power 

when it comes to deciding fund terms, such as management fees and carry. 

2. Consolidation of investments – LPs are keen to consolidate their investments with a 

few trusted fund managers, rather than spreading their allocation across a number of 

GPs. LPs with a number of existing GP relationships are streamlining their portfolio 

through selling interests on the secondaries market. Although LPs are seeking fewer 

GP relationships, they continue to maintain, or increase, their allocation to the asset 

class which leads to larger accounts with each of their GPs. 

3. Active secondaries market – LPs are actively selling their interest in funds on the 

secondaries market in order to free up capital and ensure vintage year diversification 

in their portfolios. One prominent example is that of the Government of Singapore 

Corporation who have, for the first time, hired an intermediary to handle the process 

of selling over $700 million of fund interests. 

4. Shift in power in the LP-GP relationship – LPs are not only forging closer bonds with 

GPs, they are also creating dialogue with fellow LPs in order to build up their negotiating 

power when it comes to discussing fund terms and arranging fund extensions. 

With more LPs committing more capital to fewer GPs, the amount managed by each 

GP is certain to increase which will also allow LPs to have more negotiating power. 

5. Change in GP fee structure – LPs have recently started demanding a change in the 

traditional fee structure imposed by GPs. This ranges from paying management fees 

on invested capital (rather than committed capital) to favouring customised accounts 

which come with more favourable fees. Although larger firms are able to negotiate and 

offer better deals to their LPs, smaller GPs will struggle to compete with them. 


Appendix: 

Global 

Fundraising 

Fundraising by Year 

Aggregate Capital Raised ($bn) 

500 

400 

300 

200 

100 

0 

2007 2008 2009 2010 2011 2012 

YTD 

n Aggregate Capital Raised ($bn) n Total # of Funds Closed 


Data from Private Equity International shows that global fundraising declined over the past 

few years, reflecting ongoing economic and political instability around the world. During 

the market peak in 2007, a total of $480 billion was raised by 578 funds reaching a final 

close. By 2009, only 351 funds closed globally raising just $226 billion, less than half the 

amount of capital raised in 2007. 

Since 2009, global uncertainty continued to contribute towards a muted fundraising 

environment, with both LPs and GPs proceeding with caution amidst a less than favourable 

environment. LPs who had previously enjoyed the high returns provided from their 

fund commitments were forced to lessen their allocation to private equity, with some 

completely exiting the asset class in an effort to balance out and reduce losses in their 

investment portfolio. Likewise, GPs who had previously raised funds and invested capital 

with ease were having difficulty attracting capital from LPs, as well as in exiting from 

portfolio companies and providing existing LPs with a healthy return on their investments. 

Concerns about Europe’s sovereign debt crisis, alongside widespread political instability in 

the Middle East and the repercussions of the US debt-ceiling debate, continued to hamper 

fundraising efforts in 2011 although the total capital raised increased compared to the total 

raised in 2010. Recent months have shown promising growth in private equity fundraising, with 

103 funds reaching a final close raising just over $76 billion in the first four months of 2012. 

Total # of Funds Closed 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 



and concerns 

• appendix: global 

fundraising 

page 37 


Fundraising by Strategy 

150 

institutional 

investor 

sentiment 

survey 

foreword 


allocation 

fees 



and concerns 


• 

fundraising 

page 38 


120 

90 

60 

30 

0 

Mezzanine Buyout Growth / 

Expansion 

Capital 

Venture 

Capital 

Fund of 

Funds 

n 2009 n 2010 n 2011 n 2012YTD 


Secondaries 

Turnaround 

/ 

Distressed 

Co-investment 

The overwhelming trend in fundraising over the past few years has been the prevalence 

of buyout and venture capital funds, which have consistently raised more capital than 

other strategies. In 2011 alone, 105 buyout funds reached a final closed, raising a total of 

$89 billion. Although this figure is lower than the $126 billion raised in 2009, it shows an 

improvement from 2010’s $75 billion of capital which was raised by 98 funds. 

Venture capital funds raised a total of $28 billion in 2011, through 109 funds. Bessemer 

Venture Partners’ Fund VIII raised $1.6 billion for global venture capital opportunities, 

making it the largest VC fund in 2011. A clear trend in venture capital funds is the dominance 

of North America and Asia-Pacific as both originators of venture capital funds as 

well as targets for venture capital investments. Four of the top ten venture funds in 2011 

were focused solely on opportunities in North America, with a further four targeting 

global opportunities and two focusing solely on Asia Pacific. This illustrates that whilst 

there is a growing trend towards emerging markets for higher returns, investors and fund 

managers have not yet reduced their reliance on good returns from established markets. 

Conversely, fund of funds have witnessed a sharp decline with the number of funds 

reaching a final close in 2011 totalling just 26, down from 49 in 2009. The capital raised 

has similarly decreased from just over $21.7 billion in 2009 to $6 billion in the 12 months 

to December 2011. 

In the first four months of 2012, buyout and venture capital funds have continued 

to dominate the fundraising market, with capital raised for such funds accounting for 

77 percent of the total capital raised this year, to date. The three largest funds to reach 

a final close this year were also all buyout funds, managed by Blackstone, BC European 

Capital and Hony Capital. 


Fundraising by Region 

100 

institutional 

investor 

sentiment 

survey 


80 

60 

40 

20 

0 

Asia-Pacific 

Central & 

Eastern 

Europe 

Global* 

Latin 

America 

Middle 

East / Africa 

n 2009 n 2010 n 2011 n 2012YTD 


North 

America 

Sub-Saharan 

Africa 

Western 

Europe 

*A global fund invests in two or more regions 

foreword 


allocation 

fees 



and concerns 

• appendix: global 

fundraising 

In 2011, North America-focused funds accounted for 36 percent of the total funds reaching 

a final close, raising just over $76 billion. This was followed by Global funds (28 percent), 

Asia Pacific (17 percent) and Western Europe-focused funds (12 percent). 

So far in 2012, North America-focused funds have continued to dominate the fundraising 

market, with 42 funds already reaching a final close, raising a total of $17.8 billion. 

Most funds focused on North America have been buyout and venture capital funds, with 

a number of growth/expansion capital funds also raising capital this year. 

Figures to date in 2012 indicate that global funds are on course to raise more capital 

than they have in the past three years. Year to date figures for global funds total $47 billion 

from 25 funds, in comparison, the twelve months to December 2011 saw just 60 global 

funds reach a final close, raising just over $59 billion. 

The European sovereign-debt crisis in Europe has had a clear impact on Europeanfocused 

funds raised to date this year. A total of 17 such funds have reached a final close 

raising almost $5 billion. If the trend continues, fundraising for the year is expected to 

fall well short of the $26 billion raised in 2011. 

page 39 


Published in July 2012 by 

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© 2012 PEI 

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