You know the furore over fees has reached fever pitch when the mainstream financial press starts to pick up on the tensions between private equity fund managers and investors. The Wall Street Journal earlier this week highlighted the frustrations of one GP group – Leonard Green – whose latest fund was reportedly rejected by the California State Public Employees’ Retirement System (CalPERS) because it refused to reduce fees. That followed the Financial Times’ front page coverage a month or so ago of Oxford endowment CIO Sandra Robertson challenging the traditional private equity model and its cost/benefits to investors.
While there is no denying that fees continue to rank resolutely among investors’ top-most concerns, it turns out that it’s not actually the top concern for many of them, according to a recent investor survey carried out by Private Equity International and Germany’s Technische Universität München.
Just where and how fees rank among other pressing issues that will impact a portfolio – or indeed, reshape relationships going forward – can vary greatly depending on an investor’s own circumstances and viewpoint. We asked nearly 100 LPs globally to rank a series of macro/structural issues, such as China’s slowdown; issues related to LP-strategy, like allocations and benchmarking; and GP-specific topics, including fees, the looming refinancing wall and fund extension requests.
We found there were some issues – like the large macroeconomic changes the world must face – which are of extreme interest and concern to all investors. As Christopher Ailman, chief investment officer of the California State Teachers' Retirement System (CalSTRS), told us earlier this year: “It is much harder to invest now … the global problems are so complex, so deep. Historically, I don’t think my board has ever had to track 10-year bond yields in Italy, Spain and Greece; but [it] now knows them weekly and realises that matters to how the US is doing, [as does] whether China orchestrates a soft landing or not. It is a global economy that’s intertwined and interconnected and that makes it much more complex to understand, navigate and track.”
The fate of the Eurozone, China’s slowdown and the US ‘fiscal cliff’ are keeping most investors awake at night, according to our investor survey. Nearly 70 percent of all respondents flagged the former as a key concern, for example. “A collapse of the Eurozone would lead to a collapse in the banking system and especially in leveraged lending,” one investor told us.
There are other ‘big picture’ topics, such as regulation, which matter more or less to investors depending on where they are based and how they are organised. For example, we found that 48 percent of European LPs ranked regulation a top-three concern for 2013; that compares to 40 percent in Asia and only 23 percent in North America. When looking at institution type, 47 percent of funds of funds flagged regulation as a key issue, followed by 36 percent of insurance companies, 33 percent of pensions and 18 percent of foundation/endowments. The concerns relating to this macro issue clearly link to which types of investors where are likely to be affected by new, incoming regulations in their regions. As one European life insurance manager told us: “If Solvency II goes into place our private equity programme might possibly be history.”
The differences between regions – and the maturity of those regions’ private equity markets or challenges specific to them – also become apparent when asking investors to rank specific GP- and LP-related issues they feel are most pressing for 2013. In terms of fund manager-related topics, for example, Asian LPs were most worried about GP team stability – understandable given the seemingly constant stream of spin-outs and firm-hopping in Asia – followed by management fees and style drift. European investors were most concerned with fund managers’ ability to deliver compelling returns, followed by fundraising ability and style drift – all three of which are being impacted by the Eurocrisis. North American respondents, meanwhile, also felt performance was a key issue in 2013, followed by management fees and GP team stability.
All the results from the survey, as well as related editorial features and interviews with industry practitioners on key topics, are detailed in PEI’s special ‘Perspectives’ issue. Premium subscribers can access the entire issue here.