In our last post, Private Equity Funds Feel Investor Pressure, we highlighted the findings of a Bain & Company report that uncovered a growing trend of investor disenchantment with the recent performance of private equity general partners and the general lack of transparency in their management. A more recent study by SEI and Greenwhich Associates reveals a more pointed portrayal of the changing relationship between investors and private equity managers, suggesting that, while private equity investment is increasing, investor expectations are turning up the heat on managers.
From its survey, which encompassed 400 investors, consultants and fund managers, SEI paints a double-edged sword
scenario for managers that indicates an increasing demand for private equity investments by a much more demanding investor. Driven largely by underwhelming returns available in the public equity markets, at least 25 percent of investors surveyed said they plan to increase their private equity commitments in the next year. But, there appears to be somewhat of a caveat to their commitment, and that is they expect greater attention to transparency, reporting and risk management.
While managers should be encouraged by the increased demand for private equity investment, they should be prepared for an increased amount of diligence applied by investors in selecting fund managers. More investors are raising the bar by looking beyond philosophy and performance to portfolio transparency, fees, and communications as the basis for manager selection.
It remains to be seen how the private equity industry will respond to the increasing expectations of institutional investors. The overall performance of the industry has been a mixed bag thus far in 2011. Overall industry performance has been lackluster, yet total exits in the first quarter generated record values for investors. A surging secondary private equity market is drawing an increasing portion of investor allocations at a time when the pressure is on private equity managers to increase funding. And investors are in need of investment alternatives that can generate solid returns. In the end it will likely come down to who needs who the most. Right now, the momentum appears to be moving in the direction of institutional money.
