What LPs care about

Details from sister publication Private Equity International’s Perspectives study reveals investors’ thoughts on fees, fund restructuring and ESG.

Results from sister publication Private Equity International’s LP Perspectives Survey 2019 show institutional investors’ approach to alternative asset classes. It aims to provide a granular view of the alternatives market, both current and future, by gathering insight on investors’ asset allocation, propensity to invest and performance predictions.

For the 2019 study, PEI’s Research & Analytics team surveyed 101 institutional investors across private equity, private real estate, infrastructure and private debt. Some of the results were revealing of trends within alternatives, such as private real estate dwarfing other asset classes in commitments.

High fees a tough sell

A 10-year bull run in public markets is a mixed blessing for private equity. Rising valuations make for an exciting market to sell businesses into, but the relative performance of the stock market – which is easily accessed through low cost trackers – can make private equity seem like a needlessly expensive option for an asset allocator. Sixty-one percent of limited partners said they either agree or strongly agree with the statement that “the fees charged by private equity funds are difficult to justify internally.”

Restructuring costs disputed

Our survey reports that most LPs (57 percent) have had a fund restructuring – where assets are moved from an existing vehicle to a new one with new terms – proposed by at least one of their GPs. These are complex transactions and often divide opinion among investors. More than a third of LPs who have been involved in such a proposal said they did not have sufficient time to make a decision, while a similar proportion said they had insufficient information.

While this may seem alarming, it is somewhat expected. We have frequently heard a significant minority of LPs do not have the bandwidth to assess these deals in time. Cost allocations are more divisive: nearly two-thirds of LPs said the costs of the process were not fairly divided between the GP and the fund.

Fees are a sticking point

Management fees remain the biggest bone of contention for investors during due diligence with managers and are rising up the agenda as fund sizes grow. In all, 45 percent of respondents pointed to management fees as the most contentious terms raised during negotiations on the limited partnership agreement.

ESG in play

For managers feeling the pressure from LPs to spend more time and resources in the pursuit of environmental, social and governance policies, the rather muted LP interest in ESG may come as a surprise.

For about a third of LPs, ESG is a “major consideration” in fund due diligence, with the remainder reporting ESG issues were of minor or no concern, while two-thirds say GP investments reflect their ESG policies “somewhat”. Just 19 percent say their ESG outlook was strongly aligned with manager practices.

To see all the LP Perspectives coverage on sister publication Private Equity International, click here