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Cost transparency biggest LP-GP misalignment

Clearer free structures are more important for LPs than a reduction in fees, research from State Street has revealed.

Investors want alternatives managers to prioritise improving transparency on cost more than bringing their fees down, a report from State Street has found.

In New Rules of Engagement: Adapting for Growth in Alternatives, the financial services firm uncovered “some misalignments between the areas that alternative managers believe they need to prioritise to attract investors, and the areas that investors would like them to address”.

The biggest difference lies in cost transparency. According to the findings, 39 percent of investors surveyed globally said that managers should be making changes to their fee structure, but only 12 percent of managers agreed to this view. Meanwhile 32 percent of managers agreed they should bring down fees.

“Investors want everything at a touch of a button, where they can see a general partner’s activity at any particular point in time,” Maria Cantillon, State Street’s global head of Alternative Asset Managers Solutions, tells PEI. “There’s this level of sophistication and self-sufficiency that we see more and more in terms of reporting, transparency, and getting into more alignment with their general partners.”

Cantillon also adds that asset owners don’t want to be concentrated on just one strategy or asset manager. “They want exposure right across the asset classes and with different managers – from private equity, to real estate and debt. They want to make sure their exposure is managed, and here’s where transparency becomes very important.”

The research also showed that along with improving transparency on cost, investors surveyed by State Street said managers need to have better alignment with investors’ priorities, expand their product offerings, and enhance environmental, social and governance capabilities.

To deliver on this, Cantillon observes that GPs want to build sustainability of the business for the future. “To sustain their growth, they are increasingly thinking about scale and technology investment. They are seeing that LP requirements now necessitate a whole different level of service,” she says.

Among global asset owners, Asia-Pacific sovereign and public pension funds have seen a significant growth in AUM in the last year, managing a total of $3.7 trillion and outpacing the US and Europe, according to Willis Towers Watson.

Aisling Keane, head of alternative investment solutions for Asia-Pacific at State Street, expects that with the growth in assets, sovereign wealth funds and pensions in Asia will continue to invest in alternatives as the search for alpha continues.

“This is even more so true as alternative asset classes such as private credit are demonstrating strong returns and present sound investment opportunities,” she says.

State Street surveyed more than 500 respondents representing institutional asset owners, asset managers and insurance companies from March to April 2017 for the report.