Study: A quarter of LPs plan to increase allocations

An overwhelming majority of investors who responded to a recent survey planned to maintain or increase their allocations to private equity, with high fees and a lack of transparency dissuading the remainder from committing more capital to the asset class.

Only 2 percent of the 411 investors and consultants surveyed by fund administrator SEI plan to decrease their allocation to private equity in the next 12 months, with 26 percent planning to increase their exposure. 

In the first of three reports based on the survey, entitled “The Logic of Fund Flows”, SEI said the investor types most likely to increase their current allocations were foundations, endowments and public pension plans. 

Increased commitments to private equity would principally be funded by redirecting funds previously allocated to publicly traded equities. Of those LPs intending to increase exposure, 51 percent said they would increase their allocation by between 1 and 2 percent, 28 percent targeted a rise of between 3 and 5 percent, and a bullish 7 percent planned a 10 percent or more increase. 

Family offices, followed by foundations / endowments and then corporate investors reported the highest level of allocations to private equity, with medians of 10, 9.5 and 8.5 percent respectively. Public sector retirement plans had the lowest allocations to the asset class with a median allocation of 3 percent. Overall, the mean allocation for investors was 8.6 percent. 

There was a significant divide between investors and consultants when it came to motivation: 68 percent of investors prioritised return potential as opposed to 10 percent of consultants. On the other hand, diversification took precedence for 50 percent of consultants.  

When it comes to choosing a fund manager, respondents identified the three most important factors: the quality of the management team; the clarity of investment philosophy; and investment performance. The least important factors were: independent administration; liquidity terms; and overall client service.  

The report also found a majority of investors (58 percent) were active participants in the secondary market. The report credited this appetite to factors such as the potential big discounts on offer, and the ability to access high-quality fund managers. The report’s author said the rise in secondary sales was unlikely to be due to dissatisfaction with the asset class, but warned activity might slow as valuations rise.

The survey also explored LPs’ appetite for different segments within alternative assets, with venture capital the most popular sector, followed by leveraged buyouts, growth capital and then distressed investments. Mezzanine-focused strategies were the least popular. 

Phil Masterson, senior vice president in SEI's Investment Manager Services division, stressed the shift in power in GP-LP relations, and the increasing importance of listening to investors in what he described as the ‘Era of the Investor’. “This shift in power is manifesting itself in a general increase in investor expectations and specifically in investor demands for transparency and more scrutiny of fees,” Masterson said. 

There was a disconnect between what GPs believed they were offering and LPs’ level of satisfaction, according to Masterson. He pointed to separate SEI findings which showed 85 percent of fund managers thought their investors receive all the information they needed, but only 43 percent of investors were satisfied with the data provided. This dropped to 10 percent among consultants. 

According to Masterson, lack of transparency was among the top obstacles preventing investors allocating more capital to private equity. This was also true of high fees, which a third of LPs cited as being a major barrier to increased allocations. Masterson said half of the investors surveyed would prefer graduated fees based on the size of a mandate, adding that this kind of fee-charging might generate larger commitments to funds.