Private Equity Faces Transparency For Funds Demand

With sluggish returns projected for many asset classes, institutional investors are turning to private equity as a source of alpha. But those investors expect greater transparency, reporting and risk management from managers according to a global survey report by SEI, working with Greenwich Associates. The survey report, The Logic of Fund Flows, points to a need for private equity managers to demonstrate better reporting and risk-management measures to retain and gain assets among an increasingly demanding institutional investor base. 

The survey, of more than 400 institutional investors, consultants, and fund managers, revealed that while more than a quarter of those surveyed (26%) plan to increase their private equity allocations over the next 12 months, investors and consultants differ on their investment objectives when it comes to private equity.

More than two-thirds of investors (68%) point to return potential as their primary objective as opposed to 10% of consultants; 50% of consultants, meanwhile, said diversification was their primary investment objective as opposed to only 18% of investors. “As investors are looking to achieve higher returns in an increasingly challenging return environment, private equity is coming back, but standards are higher across the board,” said Rodger Smith, managing director at Greenwich Associates.

Beyond facing different priorities from different constituencies, the survey suggests that the criteria for evaluating managers have become more demanding. Respondents still point to the traditional three Ps of People, Investment Philosophy, and Investment Performance as the most important manager selection criteria, but the fourth P, Process, is becoming increasingly important. To that end, investors ranked portfolio transparency, fees, and quality of reporting and communications as very important factors in the selection process as well.

Phil Masterson, senior vice president and head of business development, Europe, for SEI’s Investment Manager Services division, commented:

“This survey confirms what we’re hearing from our clients–investors are demanding more from managers across asset classes. While investors see private equity as an area of opportunity, they expect more from the managers in which they invest. They want greater transparency, better reporting, and lower fees. Those can only be achieved with greater operational effectiveness and that’s what it takes to compete in the era of the investor.”

The survey also shows that investor expectations for private equity have been bolstered by a recent surge of successful exits. More than 300 exits worth an aggregate value of $120.1bn were logged in the second quarter of 2011, far outpacing the previous record of $81.5bn in the second quarter of 2010. Investors are also investing in a greater variety of private equity asset types as the sector matures. In fact, more than 80% of investors polled said they invested in venture capital, leveraged buyouts, growth capital, distressed investments, and mezzanine capital. The secondary market for private equity is also thriving as investors are buying or selling to meet liquidity demands or pick up deals at deeply discounted prices.

The survey report is the first in a three-part series published by the SEI Knowledge Partnership.