Most Private Equity LPs Believe Interests Are Aligned

The real worry is valuations, according to a Preqin poll.

The majority of investors believe their interests are aligned with those of private equity managers, a survey found—but still see room for improvement on management fees. 

A Preqin poll of 226 institutional investors found that 70% saw alignment of interests. Nearly two-thirds reported a positive perception of the industry overall, citing strong performance in 2015.

“With the majority of investors happy with the returns they have received, it is little wonder that general sentiment remains buoyant and investors are optimistic about the future of the asset class,” said Christopher Elvin, Preqin’s head of private equity products.

While returns largely satisfied limited partners, management fees remained a cause for concern. Of those survey, 64% named management fees an area where alignment could be improved, up from 60% last year.

Nine out of ten (91%) said they have opted against an allocation due to the firm’s proposed terms, while a quarter do so frequently.

This is in spite of 63% of investors noting a positive change in management fees over the past six months.

Among the 30% of investors who saw misaligned interests with fund managers, nearly half (47%) cited transparency as an area needing improvement. But just 15% of total investors surveyed believed it would be the biggest challenge in 2016.

Their greatest concerns by far were pricing and valuations—picked by 70% as the biggest challenges in operating an effective private equity program in 2016. This challenge is only likely to grow bigger as 54% of respondents said they planned to make new allocations to private equity this year. 

“The biggest challenge now facing the industry lies with fund managers trying to deploy this wall of committed capital,” Elvin said. “Investors will be looking to see that their investments represent good value for money over the coming years as valuations increase and competition for assets intensifies.” 

Related: Private Equity’s Valuation Conundrum & Valuations Fail to Deter Private Equity Investors