bfinance Highlights Investor Concerns Over Private Equity Mismatch

Careful selection of private equity strategies is required to match expected returns with reality, according to consulting firm bfinance.  

(December 19, 2011) — Some institutional investors in private equity have expressed concerns about a mismatch with return from the sector.

According to a study by consulting firm bfinance, some investors have lowered their allocation to private equity due to concerns over a mismatch between target net internal rates of return (IRRs) and realized net-of-fee returns.

The result: a significant amount of capital remaining uninvested, high competition for transactions, and extended holding periods driven by lack of financing and liquidity constraints.

Commenting on the survey’s findings, Emmanuel Léchère, Head of Market Intelligence Group at bfinance, said: “Clearly private equity has a major role to play in enhancing overall returns but to align actual returns with future expectations, more institutional investors need to adopt a dynamic rather than an opportunistic approach to portfolio management that emphasizes stringent management selection, monitoring and negotiation in order to maximize the potential of investments in this asset class.”

Nevertheless, the majority of the 41 institutional investors surveyed revealed that some strategies – such as private debt – still offer a better risk adjusted return. Institutions considered expected returns from private debt investments as the most closely aligned with actual returns. In contrast, investors’ sentiment on venture capital showed the largest difference between expectations and past experience with 87% of all investors expecting over 10% net IRR and only 44% of such investors having achieved 10% or above net IRR from prior venture capital investments.

Lorenzo Rossi, Managing Director, Private Markets, bfinance added:

“This survey underscores the fact that investors should actively invest in private equity rather than simply allocating to it. Average returns in the asset class often do not justify the illiquidity and too often realized returns net of all fees fall short of expectations. Therefore Investors need to focus on selecting the right managers that can create superior absolute returns. Amongst these, investors should seek out those that are correctly aligned to extract value for investors rather than for themselves.”