equity firms are getting worried.
recent years, major pension
funds and sovereign wealth funds have been bypassing them altogether to
take direct stakes, transforming from clients to competitors. Private equity
managers see this as a trend that is unlikely to slow down, according to a
survey by MVision Private Equity Advisers and the London Business School.
“Right now these are like small waves which can turn into a tsunami in the long term.”One-third
of the 62 general partners (GPs) surveyed said they had come up against limited
partners (LPs) such as large pension funds in auction processes. Nearly half
(47%) expect to see more of them in the future.
now these are like small waves which can turn into a tsunami in the long term,”
one anonymous GP told the survey.
funds in Canada have led the way in taking direct stakes in companies, beating
competition from traditional players. The Canada
Pension Plan Investment Board outbid Apollo and KKR to buy General Electric’s
private equity lending business last year, while a consortium of the Alberta
Investment Management Company, Ontario Teachers Pension Plan, Ontario Municipal
Employees Retirement System, and the Kuwait Investment Authority bought London’s
City Airport earlier this year.
Pension Scheme and the Universities
Superannuation Scheme in the UK and the California
Public Employees’ Retirement System are all building up internal expertise
in private assets.
increased competition has pushed up valuations, according to 40% of GPs
surveyed, while more than 20% were concerned that they would struggle to meet
their fundraising targets in future.
vital that GPs understand what is driving the trend of direct LP investment,”
MVision’s report said.
answer is simple, according to the survey: Fees.
of GPs thought improved performance was the driver of direct investments, while
almost half said the ongoing debate over fees was the cause.
investors’ pursuit of reduced fees is not a new phenomenon, it is only recently
that the numbers of those venturing out on their own has increased enough to
make a significant impact on the investment community,” MVision said. “Looking
to the future, GPs will need to examine the way that their fees are
communicated and justified to investors, and work harder to demonstrate the
value that their expertise brings and the returns they can achieve.”
clients that GPs can retain are more likely to negotiate co-investment deals,
the survey found, especially as deal sizes rise. More than 80% said larger
tickets were a main reason for offering co-investment terms, while 60% said it
was demand-driven. Just 16% said they offered the option to access LPs’ skills
experience a high level of demand for co-investment,” said one respondent. “It’s
the easiest meeting to get, teams will listen fast, intermediaries and end LPs are
all staffed and more importantly focused on doing this.”
Source: MVision, London Business School
Read MVision’s report, “The
Private Equity GPs Play Favorites & Private
Equity: Co-investing vs. Commingled