Direct investing and North America are top of mind for LPs

Direct investments continue to garner favour with institutional investors who want to increase investment returns without the economic costs and fees of a limited partnership.

According to the 2018 LP Survey Report by financial technology provider Intralinks and Global Fund Media, nearly half of the 190 global LPs surveyed said the strategy is a preferred investment method and planned on making direct investments in the next 12 months.

Of this number, six out of 10 are specifically choosing to focus on the mid-market in private equity. One in four said they would be focusing on core real estate and regional infrastructure, the report found.

Investors are putting as much as 25 percent of their private equity allocations in co-investments ­– increasingly through customised separate accounts that target specific geographies and asset types, Greg Stento, a managing director and member of the global investment committee at investment firm HarbourVest Partners, said in the report.

Ron Barin, a former vice-president and chief investment officer of pension investments at Alcoa Corporation, noted that investors recognise that it is more efficient to go direct if they have built a strong internal PE team that can compete against general partners.

“Everybody expects PE to generate a premium to the public equity market of roughly 300 basis points,” Barin said. “Given that the all-in PE fee load is around 5-6 percent, it’s a hard hurdle to overcome.”

The report noted that another reason for increased appetite for co-investments is that LPs have more control over deployment of capital.

On regional focus, LPs prefer North America over Europe and Asia with respect to their allocation programmes, given that it is the largest private equity market in terms of dealflow and investment dollars.

Across alternative investments, LPs were most happy with their private equity programmes delivering performance broadly in line with their expectations in the past year, followed by private debt and real estate.

“We still see lots of interest from SWFs and large family offices,” Francois Le Ruyet, a partner at fund of funds Quilvest Private Equity, said in the report. “We don’t see any signs of LPs shying away from private equity because they are worried that asset valuations are too high.”

Financial technology provider Intralinks and Global Fund Media surveyed 190 LPs across North America, Europe and Asia, of which 22 percent were family offices, 23 percent endowments and pension funds and 19 percent funds of funds. It is unclear what types of LPs comprised the remaining 36 percent.