The last 12 months have been the best of times and the worst of times for investors in private equity.
On the one hand, the industry delivered another year of great returns, as buyout firms continued to enjoy buoyant credit markets and benign economic conditions.
However, with a record number of firms in the market for funds, and more new money pouring into the asset class than ever before – 684 funds garnered $432 billion between them in 2006, according to Private Equity Intelligence, 38 percent more than the previous year – limited partners had a harder time getting the right allocations to the right funds than ever before.
And the bad news is, the situation is unlikely to ease any time soon – indeed, there are signs that 2007 could be even bigger. With a number of mega-funds still in the market, it has been suggested that global fundraising for the year could break the $500 billion mark.
As long as GPs are enjoying stellar returns, competition for allocations will remain fierce. So for the time being, the balance of power in this critical relationship continues to lie firmly on the side of the GP.
In this context, PEI's annual survey on general partner attitudes to their LPs came at an opportune moment. At a time when access to the top-performing funds is a problem for many investors, it is crucial that they understand what GPs look for in their clients: which characteristics do they expect the LPs to have, and who do they consider to be the best in the business?
Participating in the survey were investment relations and fundraising professionals at leading private equity firms globally – no gatekeepers, fund of fund managers or other industry professionals were invited. To ensure that feedback was as full and frank as possible, all responses were made anonymously and treated in complete confidence.
The questions fell into two broad categories: what kind of qualities a GP looks for in their LPs; and which funds best embodied these qualities – both by geography and by institution type. And at a time when GPs and LPs are spending a lot of time at the negotiating table, we were also keen to discover which LPs were the best prepared; who were the most knowledgeable, and who drove the hardest bargain?
TOP-RANKED LPS BY GEOGRAPHY:
|Most influential North American||Most influential|
|2.Harvard Management Company||2.Macquarie|
|3. Yale University||3.Temasek|
|4. Goldman Sachs Private Equity||4. Asia Alternatives|
|5.Canadian Pension Plan|
|Most influential Middle East|
|Most influential European||investors:|
|investors:||1. Abu Dhabi Investment|
|2.Standard Life||2. Kuwait Investment Office|
|3.Partners Group||3. Qatar Investment Authority|
|4. Allianz Private Equity Partners|
TOP-RANKED LPS BY TYPE:
|Top global public pension plans:||Top global funds of funds:|
|2.NYSTERS||2. Partners Group|
|3.Michigan State||3. Goldman Sachs Private Equity|
|5.0MERS||4. Pantheon Ventures|
|5. Adams Street Partners|
|Top global corporate pension|
TOP-RANKED LPS IN QUALITATIVE AREAS:
|1. Alplnvest Partners|
|Most sophisticated investors in PE:||2. Standard Life|
|1. Yale University||3. Goldman Sachs Private Equity|
|3.CalPERS||4. Northwest Mutual|
|4. Canadian Pension Plan||5. HarbourVest Partners|
|Most effective expanders of|
|private equity activities in the past|
|Most stringent in negotiations:||year:|
|l.GIC||1. Alplnvest Partners|
|2.Penn State||2. Canadian Pension Plan|
|3.Standard Life||3. Partners Group|
|4. Alplnvest Partners||4. Capital Dynamics|
|5.CalPERS||5. Pantheon Ventures|
Which type of LP do you consider the most desirable investor in your funds (multiple choice)?
|Public pension plan||38%|
|Corporate pension plan||31%|
|Government agency/investment company||12%|
|Fund of funds||12%|
|Permanent capital vehicle||6%|
Which qualities do you most highly rate in a limited partner (multiple choice)?
|Long-term commitment to the asset class||53%|
|Private equity knowledge||29%|
|Low staff turnover||24%|
|Competent due diligence||12%|
|Ability to execute co-investment||6%|
How important are Asia, Australasia and the Middle East as as a source of institutional capital to your firm?
|We expect to raise up to 5 percent of||23%|
|future funds from the region.|
|We expect to raise up to 10 percent of||49%|
|future funds from the region.|
|We expect to raise up to 25 percent of||28%|
|future funds from the region.|
|We expect to raise more than 25 percent||0%|
|of future funds from the region.|
THE NEXT GENERATION
GP feedback on institutions outside North America was equally interesting. LPs in Europe and the rest of the world may not have the same kind of longevity as the likes of Yale and CalPERS, but it is clear that some have already established themselves among the most admired and highly-prized investors in the business. And with many GPs keen to diversify their investor base to make it more global – as evidenced by the recent $3 billion tie-up between The Blackstone Group and an investment arm of the Chinese government – this trend is only likely to continue.
The most highly regarded LP in Europe appears to be AlpInvest Partners, which since 1999 has managed €30 billion of private equity assets for Dutch pension funds ABP and PGGM. AlpInvest was comfortably ahead of the pack in the European LP category, and was also voted as the LP that had most effectively expanded its private equity interests in the last 12 months.
AlpInvest was also voted the best co-investor – an area that many GPs remain sceptical about. Only 6 percent of respondents identified coinvestment capacity to be a desirable quality in their LPs – perhaps reflecting the fact that many consider it a weakness of most LPs. “Co-investment is still something that many LPs ask for and few can do well,” one said. “When it works it can be great, but not everyone has the resources.” Clearly AlpInvest – and Standard Life, another European investor, which was placed second in this category – are exceptions to this.
The survey also sought to identify the most influential investors in Asia – clearly a region where many GPs are keen to attract new LPs. All respondents expected to raise at least 5 percent of future funds from the region, with half expecting this proportion to reach 10 percent. A quarter were even more bullish, expecting to raise as much as 25 percent of future capital there.
The most admired – and possibly feared – LP in Asia, according to our survey, was GIC, the Government of Singapore's investment arm. The winner by some distance of our Asian category, GIC is also consolidating its global reputation – it was voted the most stringent investor at the negotiating table of any group in the world, while it was also highly placed in the “most sophisticated” and “most consistent” categories.