General partners (GPs) expect to face increased competition for deals as growing numbers of limited partners (LPs) target transactions through direct investment, according to research by the London Business School on behalf of MVision Private Equity Advisers.
Almost half of GPs surveyed predict having to go head-to-head with LPs in acquisitions, with one in three already having done so in the last year.
GPs are also concerned that the rise in direct investment from LPs will significantly impact their ability to operate effectively. Almost 50 per cent of GPs questioned by the London Business School view Mega LPs – investors with the capital to invest directly in transactions usually reserved for private equity funds – as direct competitors in deal origination. Almost 40 per cent think this development has led to inflated valuations, as LPs working to different targets can afford to offer higher bids. Crucially, a third of GPs think that direct investment will make it harder for them to secure commitments in future fundraising in the longer term.
The rise in direct investment is being driven by LPs’ pursuit of a better overall return, with almost half of GPs questioned citing concern over industry fees as the main contributor to the trend. Just four per cent of GPs thought that poor performance was a trigger for direct investment, with many perceiving fund terms as the more likely cause.
Although the trend may raise some concerns amongst GPs, the report shows that it may take some time yet for Mega LPs to truly rival private equity firms’ performance. GPs identified a multitude of reasons for why Mega LPs may struggle to enter the market, including limited industry knowledge (23 per cent), lack of transaction experience (22 per cent) and the speed of due diligence required to execute transactions (20 per cent).
Mounir Guen, founder and CEO of MVision Private Equity Advisers, says: “Many LPs avoid direct investment due to the reputational risk it may carry. In this respect private equity firms have historically acted as a useful buffer between investors and assets. However our research clearly shows that the tide is turning, as LPs seek to modernise fund terms that they believe are in favour of the GPs.
“In addition to the more established Mega LPs of North America and Australia, we are now starting to see capital from Asia and the Middle East being funnelled into direct investment. The perceived experience gap is exactly what many GPs hope will keep them ahead of their competitors in what is becoming a very crowded market place. Over time it will not.”
