A majority of limited partners feel their liquidity needs are not met by the secondaries market and are seeking alternatives, according to a new report from preferred equity firm 17Capital.
Liquidity in Private Equity Funds, which surveyed 50 LPs and general partners from Europe and North America, found that 62 percent of LPs felt their needs were not met by the secondaries market and 69 percent felt it was burdensome to sell.
Sixty-seven percent of LPs said that they have used or would consider using an alternative liquidity solution, such as preferred equity or debt tranches.
Pierre-Antoine de Selancy, managing partner of 17Capital, said that while it may be easier to sell a position in a well-known fund because buyers are likely to have the information they need to diligence the assets, it is still laborious in the case of smaller or more niche funds.
“There’s much more work required and the LPs often start the process knowing it will create a loss in the portfolio,” he said. “You might have some cases in which GPs are unwilling to give their consent, they might only accept certain investors or direct the transaction towards existing investors instead of new ones… It’s much simpler today than it was 15 years ago but it still involves quite a lot of work to get a transaction going.”
The study also highlighted a divergence in the views of LPs and GPs when it comes to the pace of distributions from mature funds. Sixty percent of LPs have expressed dissatisfaction with the pace of liquidity from these funds, compared with 21 percent of GPs.
Jas Sidhu, investment manager at the West Midlands Pension Fund, is quoted as saying: “We have had an excellent sellers market for the last four to five years and mature funds have not been able to return capital. Is it because GPs were too slow to deploy capital post-crisis or are they really bad at exiting?”
De Selancy believes that most GPs are doing a good job distributing to their LPs, but that the poor ones tend to leave a bigger impression.
“When you re-up or decide to commit to new funds, perception is everything,” he said. “GPs shouldn’t underestimate perception of their clients, the people paying the fees and the rents for the offices. I strongly believe that businesses in our industry start with LPs and not the investment team.”