With influential investors in private equity, including names such as the California Public Employees' Retirement System and the Abu Dhabi Investment Authority, reducing the number of manager relationships they have, it is tempting to conclude this is part of a wider trend. But while certain large asset owners are putting their capital in the hands of a smaller number of managers, they are in the minority, according to two recent surveys.
Almost 80 percent of LPs are looking to form five or more new GP relationships in the next three years. The majority – 55 percent – expect to form between five and 10 new relationships, while a further 24 percent expect to form 11 or more new relationships, according to Coller Capital’s Global Private Equity Barometer Winter 2016-17, which polled 110 private equity investors globally.
“This does go slightly against the trend of giving more capital to fewer names in private equity, but there are a couple of things at play here,” Coller partner Stephen Ziff told Private Equity International.
“You’re getting PE teams from within established funds who are looking to branch out and go independent. They’ll be first-time funds but not necessarily first-time managers, because they’ll be an experienced or seasoned team.”
There are also new products and strategies, such as debt funds, coming into the private capital market place, Ziff said.
“There’ll be LPs looking to establish GP relationships in new subcategories.”
Coller’s findings chime with those of PEI’s Perspectives 2017 survey, which found that 43 percent of global limited partners are looking to increase the number of GPs they work with. Just 17 percent of survey respondents indicated they were looking to decrease their GP relationships.
The Barometer found almost 40 percent of private equity investors expect to increase their allocation to private equity in the next 12 months.
“In an environment where interest rates are low, you’ve got mature pension funds that have got liabilities to satisfy, they’re looking to deploy capital in private equity, and they are looking for new and interesting managers,” Ziff said.
Investors are also looking to beef up their in-house private equity expertise. More than 90 percent are asking their new hires to focus on direct investments and co-investments.
“The growth in LPs investing in co-investments and direct private equity programmes is a theme that has become more prominent throughout the Barometers, over the last 18 to 24 months,” Ziff said.
“Traditional PE funds are still a major part of the market, but increasingly as the more sophisticated investors look to grow the size of their PE teams, they’ll be looking for new channels to put capital to work.”
However, almost two thirds of LPs think the economics of co-investing will change, predicting that co-investments will be accompanied by fees and carried interest in the future.