INSTITUTIONAL INVESTOR SENTIMENT SURVEy - PEI Media

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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 executive summary Source: Private Equity International 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 lp – gp relationship • future investments and concerns appendix: global fundraising page 35 www.privateequityconnect.com
Private equity is coming under increased scrutiny institutional investor sentiment survey foreword executive summary allocation fees lp – gp relationship future investments • and concerns appendix: global 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. www.privateequityconnect.com
Page 1 and 2: Institutional Investor Sentiment Su
Page 3 and 4: institutional investor sentiment su
Page 5 and 6: LP Respondents Breakdown Where is y
Page 7 and 8: Allocation institutional investor s
Page 9 and 10: Over the long-term, private equity
Page 11 and 12: Co-investments provide LPs with gre
Page 13 and 14: Fee breaks should be negotiated dep
Page 15 and 16: Fees should be calculated in connec
Page 17 and 18: LPs are requesting a “Europeansty
Page 19 and 20: GP fund commitments should be a mea
Page 21 and 22: SWFs prefer to target sectors which
Page 25 and 26: A vast majority of LPs conduct due
Page 27 and 28: There is room for improvement with
Page 29 and 30: Focus on… Endowments Distribution
Page 31 and 32: Strategy Appetite institutional inv
Page 35: The prevalence of zombie funds has
Page 39 and 40: Fundraising by Strategy 150 institu
Page 41: Published in July 2012 by PEI Secon

INSTITUTIONAL INVESTOR SENTIMENT SURVEy - PEI Media

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