Investment vehicles tailored to an individual investor, known as separately managed accounts, have been around since some of the industry's biggest – and most long-standing – managers first opened their doors. But in the last five years, funds of funds managers have found limited partners increasingly seeking products tailored to their particular needs.
“We are definitely seeing an appetite from investors to have a separate account for their money that can be used in a more specific way for them,” says Kate Simpson, a partner in the private investment funds group at Proskauer.
“It allows a more tailored approach, some flexibility; it has some benefits for certain types of investors in certain situations who may or may not also want to [commit to] a pooled vehicle.”
Adams Street Partners sees the move towards separate accounts as going “back to the future”. When its investment programme began in 1972, clients invested exclusively through these vehicles. In 2016, the firm gathered more than $2 billion through SMAs, which today make up around 15 percent of its $29 billion assets under management.
Hamilton Lane has also offered SMAs since day one. “In the beginning, funds of funds were a good way for people that wouldn't otherwise have access [to the asset class] to get access,” says Jeff Meeker, a managing director who is on the Philadelphia-based firm's investment committee.
Morgan Stanley Investment Management's $10 billion in private equity AUM is split fairly evenly between commingled funds of funds and SMAs, while 20 percent of the capital entrusted to HarbourVest Partners in 2016 was in separate accounts.
“We're definitely seeing an increase in demand for customised solutions more recently, as clients seek to either meet their specific asset allocation requirements with a single investment or complement their in-house programmes with specific niche allocations,” says Aris Hatch, a managing director at HarbourVest focused on custom solutions.
Neil Harper, chief investment officer at MSIM, stresses that SMAs are not right for everyone; to make them economically attractive, clients must commit a sizeable amount. However, for those with the money to put to work, SMAs have one major – and obvious – selling point: the ability to design a bespoke vehicle.
“If you are in a commingled fund, by the nature of the vehicle the manager finds one solution that fits a large number of investors. So clients tend to end up with a 'one size fits all' approach,” says Roberto Cagnati, managing director and head of the portfolio and mandate solutions team at Partners Group, around 35 percent of whose €54 billion AUM is in separate accounts.
That flexibility allows for adjustments during the life of the account. For example, an insurance company with Solvency II requirements may slow its investment pace.
This is why it's important to revisit and adjust the investment plan, says Christophe Bavière, chief executive and managing partner of Idinvest, for which SMAs now account for “between half and a third” of the €2.7 billion the firm has under management for non-direct and co-investments.
“Chances are, the needs of your client may have evolved; he's looking for an acceleration, [or] a slowdown, [or] to come back to the core of the strategy, or he's open to go into more alternative choices.”
Many institutions turn to funds of funds managers to manage a specific part of their private equity portfolio, such as emerging markets or venture capital.
For some, there are regulatory reasons why an SMA might be appropriate, says Cagnati. “For other clients, it's about having a greater degree of control, being able to stop commitments at [any] point, being able to look, from a governance perspective, more closely at what we do, and just have the ability to influence if need be.”
Investors typically choose a manager on the strength of their expertise and relationships with GPs in the market – so it's highly likely several SMAs and a firm's commingled vehicles could be seeking an allocation to a single GP.
Managers must be transparent with their clients on how they address this. “Most managers, because they want to treat their clients fairly, and because they are regulated, will have a firm allocation policy,” Simpson says.
So what does that policy typically look like? All the firms Private Equity International spoke with gave the same answer: pro-rata allocation across all vehicles for which an investment makes sense. No single account or vehicle should take precedence.
Both Partners Group and Hamilton Lane manage more than 70 SMAs. For both, the amount by which this could grow is defined by the size of the private markets in which they invest and how much capital they can put to work each year.
For Harper, too, it's not the number that's important, but the total capital MSIM is comfortable putting to work in a given time period. “If they're all treated equally as pools of capital, we believe it doesn't matter how many you have, it matters how much capital you have in total.”
Idinvest manages around a dozen separate accounts; although there is room to grow, to go above 20 would “start to be difficult”, Bavière says.
“When we [take on] a new client it's because we feel comfortable to offer him a tailor-made service, first, and second, we feel very comfortable with the probability of providing access to hard-to-get funds, which is definitely the real value-add of our job.”
For him, half of the outperformance comes from fund selection; the rest comes from the trust between the two parties, allowing the client to “accelerate when it's needed, slow down when it's needed” and introduce more flexibility to chase after the best opportunities.
“The way you create a relationship with your final client, the way you put more flexible guidelines, the way you share the risk, is the most important factor of value creation in a private equity strategy by far.” He emphasises: “by far. And people always, always underestimate it.”