LPs emphasise transparency in GP selection process

A private equity survey found transparency has become more important in the GP selection process, while GP reputation has fallen in importance.

Limited partners are putting increasing importance on the transparency of a private equity fund when selecting new fund managers, according to a new survey, as reported by sister title Private Equity International.

In “The Future of Private Equity”, a recent survey conducted by investment operations and management services provider SEI, about half of LPs said portfolio transparency is “very important”, compared with just 29 percent who picked transparency as the most appealing trait about a fund in SEI’s 2013 survey.

Although fund manager reputation and credentials were not as emphasised as in the past, the leading criteria for most LPs continues to be a fund’s investment performance, with three-quarters of LPs in the survey calling it “very important”.

“LPs are trying to find where they can get the best returns,” SEI Investment Manager Services managing director and senior vice president Jim Cass told Private Equity International.

“Pedigree of the manager is certainly important, but I also think transparency has become more prevalent. If you’re a general partner giving your investors more transparency in your process, you’re more apt to successfully raise capital.”

The heightened focus on transparency is also driving LPs to look for co-investment opportunities, with nearly one in five LPs saying in the survey they would rather pursue this strategy than commit to a traditional private equity fund.

This is in part because co-investments offer better economics on fees and other terms, but also because they give LPs the ability to participate more actively in due diligence during a deal-making process.

“LPs can benefit [from co-investing] by researching deals,” Cass said. “It’s becoming more prevalent.”

In fact, increased transparency was the most obvious change the industry has undergone in recent years as indicated by the survey respondents. When asked which change in the industry they witnessed the most in the past few years, 76 percent of GPs, 63 percent of LPs, and 62 percent of consultants in the survey picked “more transparency”.

Here are other takeaways from the 2016 survey:

  •  As more private equity managers offer strategies focused on liquidity products and hedge fund managers launch products with committed, locked-up capital, there is a blurring line between the two sub-asset classes, which may not have “a meaningful distinction” 10 years down the road;
  • Private equity remains highly popular, with 64 percent of LPs saying they plan to raise their private equity allocation in the next few years, versus just 26 percent that said so in 2011; and
  • Most of the growth in fundraising is expected to come from family offices and foundations, due to their flexibility with capital.