European GPs put more skin in the game – survey

In its latest annual GP trends report, Investec finds career satisfaction among European fund managers at an all-time high and an increased willingness from GPs to up their personal exposure to their funds.

European fund managers are increasing their skin in the game, signalling confidence in their investment prospects, according to Investec’s latest Fund Finance GP Trends 2015 report.

According to the survey, 29 percent of respondents expect to commit between 2 percent and 3 percent of a fund’s overall capital as a team, up from 15 percent last year. Eleven percent expect to commit between 3 percent and 4 percent, up from around 4 percent last year, and around 12 percent expect to commit more than 5 percent, roughly the same proportion as in 2014.

The report, now in its sixth year, surveys 81 private equity professionals in the UK and Europe managing funds with approximately €58 billion of combined commitments.

More than 90 percent of survey respondents remain at least as happy with their careers in the private equity industry over the course of the year, up from 82 percent in 2014.

However, Investec predicts that many junior and mid-level private equity executives may have trouble finding the capital needed to personally invest in their firms’ next funds. Around half indicated that they don’t have the immediate liquidity to meet their commitments, up from around a third in 2014, with around 14 percent intending to resort to external financing.

More than 67 percent consider the need for clear a succession plan to be critical to their firm’s long term success. However, more than a quarter said their firm had failed to put in place an adequate succession plan, and 16 percent said they were unsure whether their firm had a plan for succession. More than half said they were unsure whether their investors were happy with their firm’s current succession plans.

Regarding funds’ management fees, just over 19 percent said their firm would change their management fee structure; almost half of respondents cited investor pressure as a primary cause for management fee structure changes across the private equity industry.

However, with the average size of a Europe-focused private equity fund reaching $604 million this year – up from a post-crisis low of $285 million in 2010, mentioned in the report – LPs have told Investec that it has been tough to secure “material changes” to management fees, and that upper mid-market and large-cap funds “continued to charge fees that were out of kilter with the costs of running a firm, causing a significant lack of alignment with investors”.

Readily available debt and increasing competition from new acquirers in both the trade and sponsor communities are continuing to push up prices, creating a healthy exit environment. However, high valuations have caused issues on the buy-side, with 72 percent of respondents citing competition for assets and pricing as one of the biggest challenges for the private equity industry in the 12 months and 39 percent of respondents describing it as a “major” issue.