- The number of Limited Partners (LPs) having ‘special accounts’ with GPs has jumped dramatically
- An LP’s scale and degree of operational freedom help determine the level of its returns, LPs believe
- Individuals with outstanding track records are the ‘magic ingredient’ for LPs considering debut funds
Fully 84% of LPs believe that private equity investors in general do not have the skills, experience and processes needed to do co-investing well, according to Coller Capital’s latest Global Private Equity Barometer. This is not only because meeting GP deadlines is hard (though 71% of investors acknowledge this) or because they are unable to recruit staff with the necessary skills (acknowledged by half of LPs) – but also, 55% of investors say, because Limited Partners have an insufficient understanding of the factors that drive the performance of co-investments.
Investors also expect a divergence in the returns that different types of Limited Partner will earn from the asset class. They believe small investors are increasingly being disadvantaged by the volume of money being committed by their large peers to individual funds (because small LPs have limited access to, and less negotiating-power with, the best GPs, for example). They also think that investors with a higher degree of operational freedom (to embrace direct investing, or open overseas offices, or set their own compensation levels, say) will achieve higher returns from private equity than more constrained investors.
The proportion of LPs with special (or managed) accounts attached to private equity funds has risen dramatically in the last three years or so – from 13% of LPs in Summer 2012 to 35% of LPs today. 43% of investors believe that this growth in special accounts is a negative development for the industry, on the grounds that it creates potential conflicts of interest.