As the industry projected sluggish performance for many asset classes, institutional investors turning to private equity are calling for greater transparency in reports and risk management, according to a global survey report.
A survey of more than 400 institutional investors, consultants and fund managers found while 26% planned to increase private equity allocations over the next 12 months, investors and consultants differed on their investment objectives.
While return potential was the objective for 68% of investors, diversification was the primary investment objective for 50% of consultants.
Private equity returns
“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 Greenwich Associates managing director Rodger Smith.
In this context, the criteria for evaluating managers had become more demanding, he said.
While respondents pointed to people, philosophy, and performance as the most important manager-selection criteria, process was becoming increasingly important, he added, saying investors ranked portfolio transparency, fees, and quality of reporting and communications as very important factors in the selection process.
“Investors are demanding more from managers across asset classes,” according to Phil Masterson, senior vice president and head of European business development for SEI’s investment manager services division. “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.”
However, while return potential was a main focus for investors, the head of private equity investment solutions and general manager of Castle Private Equity Hans Markvoort said it was too early to tell whether equity market declines and volatility would have a lasting effect on private equity markets.
Private equity theme
He said M&A activity would nonetheless be an important private equity theme.
Over the next one ot two years, Markvoort said there would be certain regions, such as Asia, and industries, such as technology, where he expected continued profit growth of underlying companies.
“Turbulent markets can provide good investment opportunities for the discerning investor and Castle’s Private Equity investment capacity will be used to pursue such opportunities,” he said.
Some reduction in exits could be expected as the IPO window, used to support the exit of venture investments, appeared to be partially closing, believed Markvoort. However, he said sales to trade buyers should continue due to the substantial cash reserves many corporations had built up over the past few years.
“Private equity funds have financial and managerial capacity to allocate as their current investments have reduced their risk profiles significantly in the past two years,” said Markvoort.
