The growing number of large LPs entering the private equity market is proving a double-edged sword for GPs, with more managers now facing institutional levels of scrutiny and calls for greater regulation.
• One third of LPs say trust in their GPs has increased in the past five years, but 20% say it has decreased, Private Equity Wire research shows
• Most LPs think there should be stricter oversight and regulation of private equity, with the SEC calling for improved protection of LPs
• The increase in the number of large private equity allocators is prompting predictions that the asset class may be forced to increase transparency
The growing number of large LPs entering the private equity market is proving a double-edged sword for GPs, with more managers now facing institutional levels of scrutiny and calls for greater regulation.
Among LPs surveyed for Private Equity Wire’s latest Insight Report, one third said that trust in their GPs has increased over the past five years, with 20% saying it had decreased.
Interviewees noted how increased legislation will aim to boost LP trust in their GPs and also seek to legitimise the asset class as it continues to boom, and new investors allocate to private equity.
“Investors want more regulation because of something more nuanced than regulation for regulation’s sake; it legitimises the asset class,” said Jessica Gill, director, private capital, Edelman.
The importance of returns has slipped, with a recent survey from Edelman that showed 74% of LPs think there should be stricter oversight and regulation of PE and revealed overall returns as only the fourth most important factor in trusting a GP, behind transparency, reputation, and having a good quality leadership team.
In the US, the SEC is calling for improved protection of LPs after it found certain GPs fail to seek consent for conflicts of interest; fail to seek consent until after a transaction occurs; and fail to provide complete information to LPAC members. It also wants to see more “fairness of opinion” for LPs during the valuation process of a GP-led secondary deal.
Nest head of private markets, Stephen O’Neill, says: “We need regulators to produce more tailored regulation in PE which is adapted for different types of LPs – or, at the very least, regulation which distinguishes between institutional and individual types of investors.”
A large US pension fund adds that the biggest issue facing LPs in terms of a GP’s transparency is the generic nature of information, which is shared by the big PE houses, which often isn’t relevant to the broad range of investors entering the asset class. The pension fund wants to see appropriate regulation according to investor status rather than a blanket approach.
The growth of private equity in the last five years and the increase in larger investors, such as pension funds, means that most investors believe the asset class will be forced to self-regulate, one way or another.
“If you’re a pension fund looking to invest more in private equity, one way to make your stakeholders comfortable with this is by showing you’re working with well-managed firms, and regulation, like ESG and DEI, is a component of that process” says Edelman head of capital markets for EMEA, Alex Simmons.
ILPA’s well-known template on fees disclosure, launched in 2016 and now used by over two thirds of LPs, was made to promote better practice and more standardised reporting across PE.
The association continues to advocate for greater transparency in PE, but some believe that societal pressure will also increase the momentum, with Coller Capital’s latest Global Private Equity Barometer showing 59% of LPs believe that the PE industry will be forced to self-regulate in the coming years, due to mounting societal pressure from investors and increasing demand for the asset class.
Key implication | GPs: Smaller private equity managers can get ahead of the regulatory curve by signing up to industry standards and/or demonstrating a commitment to self-regulation – those that don’t may soon find themselves struggling to get larger tickets over the line.
