Smaller LPs missing out to larger peers: survey

Smaller LPs often lack the expertise to be successful at co-investing and are losing out to larger peers on fees and terms as part of a ‘permanent shift’ in GP/LP relations, a recent survey by Coller Capital finds. 

An increasing divergence between the fortunes of differently-sized limited partners and a lack of expertise when executing co-investments and direct investments was highlighted in new research from Coller Capital.

Some 84 percent of respondents to the group’s latest Global Private Equity Barometer believed that private equity investors did not have the requisite skills, experience or capabilities to make successful co-investments.

For 71 percent, the prime reason was difficulty in meeting GP deadlines to commit, but for half of respondents it was a lack of ability to hire staff with the pre-requisite skills, while 55 percent thought LPs had insufficient understanding of the factors that drive the performance of co-investments.

Sebastien Burdel, a partner in Coller’s New York office, told Private Equity International: “We are seeing some permanent shifts in the nature of the relationship between GPs and LPs, with much closer interaction. Much is in the shape of increased direct investments and managed accounts, but this has its own challenges.”

The shift in the GP-LP relationship is manifesting itself between smaller and larger LPs. [One] example is in co-invests, where there are those investors that have the freedom to look at them and those that don’t. Not everyone has the skill and experience to do that, with 84 percent of investors saying more LPs lack the necessary skills.”

Another key trend thrown up in the survey was evidence of a growing divergence in terms of what different-sized LPs will earn from the asset class, with larger LPs who are able to commit larger cheques — and therefore achieve greater bargaining power on fees and term — at a significant advantage.

The survey found that the proportion of LPs with special or managed accounts attached to private equity funds has risen dramatically in the last three years, from 13 percent of LPs in summer 2012, to 35 percent of LPs today, while 43 percent of respondents believed that the growth in special accounts would have a negative impact as it would create ever-greater conflicts of interest.

Burdel said: “Our survey shows that LPs are conscious of the conflicts special accounts can bring and that many investors want the GPs to focus on making good investments rather than managing conflicts.

“Coller Capital doesn’t have any managed accounts and we only raise one fund at a time in order to avoid potential areas of conflict,” he added.

The survey also highlighted the growing popularity of the asset class, with direct investing on the rise.

Just 8 percent of respondents believed that direct investments would ever supplant co-mingled investments, although a third of respondents planned to hire direct specialists over the next two to three years.

Around two-thirds expected both types to remain an important part of their investment portfolio however.

An appetite for the asset class in general, as well as for emerging markets was revealed in the results, with LPs with more than a tenth of their portfolios in emerging markets saying that their exposure would increase from 27 percent to 44 percent over the next three to four years.

Some 37 percent expected China to be a more attractive prospect for private equity in five years’ time, compared to just 17 percent who believed it would be less attractive.    

Overall, 41 percent intends to increase its allocation to alternative assets over the next 12 months, with 46 percent looking to increase infrastructure assets, and 37 percent planning to boost private equity exposure.