Smarter LPs are forcing industry change: study

GPs are now more likely to fall into three distinct categories – publicly-listed global asset managers, regional or industry specialists, and small start-up funds, according to a study by the London Business School’s Coller Institute of Private Equity.

Institutional investors have become increasingly sophisticated over the past three decades, which is having an impact on GP/LP relations and shifting the categorisation of private equity managers, according to fresh research from Adveq and the London Business School’s Coller Institute of Private Equity.

From the 2000s to the 2010s, LPs have become particularly knowledgeable on the private equity investment structures available to them, including the traditional commingled model, separately managed accounts, co-investments, joint ventures and direct investments.

While LPs are still somewhat inexperienced with investing in fund of funds, they are also adding to their sophistication by exploring even more strategies in the private equity investment space, like partnering with other LPs to invest in funds and outsourcing their private equity functions entirely.

The research forecasts that many private equity firms will have to restructure their business models and approaches in response to these shifts in LP sophistication and demand. The study’s authors expect to see greater collaboration and partnering between LPs, including mergers, in order to drive down investment costs; increasing use of direct investments by LPs; and changing investment terms, they noted.

The paper also predicts that, in the medium term, private equity firms will begin to fall into three distinct categories: publicly-listed, global asset managers managing more than $50 billion; regional or industry specialists working with institutional investors looking for investments that can generate high, absolute returns; and small start-up funds that will attract endowments, high-net-worth individuals and family offices due to their limited track record and small fund size.

The study examined historical patterns and evidence and surveyed the attitudes of around 70 players in the private equity market, including GPs, LPs, regulators and non-governmental organizations.