It’s pretty much become gospel that in the private equity world, limited partners want fewer GP relationships on their books. They are maddeningly selective when considering new commitments and ending existing relationships with managers that don’t meet their portfolio needs or returns expectations.
So it was particularly surprising earlier this week when private equity advisory firm Fimeris unveiled an investor survey which showed 56 percent of its 113 respondents had increased the number of private equity managers in their portfolios last year.
On the surface, this sounds like good news for the many firms raising new funds; however, it’s worth pointing out that it was only in 2010 and 2011 that some limited partners began making private equity commitments again, after having largely put things on hold in 2008 and 2009 as markets teetered and their portfolios were thrown off-kilter by the denominator effect. Taking on some additional managers last year could also have been a function of the sheer volume of product in the marketplace, with 1,500-plus funds estimated to have hit the fundraising trail.
The findings of the survey, which queried investors in 15 countries, made clear, however, that the conventional wisdom about difficulty in fundraising and LP appetites isn’t wrong: respondents estimated that only a small portion of their private equity allocations was focused on new relationships. And the market this year is predicted to be just as crowded, if not more so, than last year. “I think a lot of [firms] have held out as long as they can to see if the portfolio will recover before coming to market. They’ll all attempt to come back,” said one pension investment official.
As a result, competition will continue to be fierce and the managers that will find success, as we’ve noted before, will be those with impeccable track records. They’ll also have committed investment teams with proven value creation strategies, the ability to navigate difficult market cycles and – crucially – strong wills, as it isn’t going to get any easier anytime soon.