In the wake of several years of underwhelming performance and lack of liquidity, many private equity fund managers are increasing transparency and decreasing fees to attract and retain skeptical investors, according to a global survey report released by SEI in collaboration with Greenwich Associates.
In fact, the majority of managers polled (59 per cent) said they have increased transparency to retain/attract new capital since the 2008 market decline, while more than a third of managers (37 per cent) said they have lowered management fees. The survey report, titled "Client Knowledge to Competitive Advantage," points to both an increasingly wary investor base and an increasingly competitive landscape for capital as the private equity market begins to show signs of life.
"While there is some optimism in the private equity space, the survey shows that investors are demanding more transparency and many managers are still playing catch up," says Ross Ellis, Vice President and Head of the SEI Knowledge Partnership for SEI’s Investment Manager Services division. "Managers are investing in reporting and client service but in some cases it is not enough for a skeptical investor base. The expectations are much different in the wake of the financial crisis and meeting those ever changing needs will be the difference between winning and losing in the Era of the Investor."
The survey, of more than 400 institutional investors, consultants, and fund managers, revealed that outside of performance, 22 per cent of managers said their greatest challenge was getting investors comfortable with infrastructure. Additionally, providing satisfactory performance attribution data was identified as the greatest challenge by 18 per cent of managers polled. To that end, the majority of managers polled (51 per cent) said they have made investments in client reporting in the past 18 months or plan on doing so in the next 18 months. A similar number of managers polled (49 per cent) said they have made investments in client service in the past 18 months or plan on doing so in the next 18 months.
"Institutional standards are clearly coming to the private equity space," says Rodger Smith, Managing Director of Greenwich Associates. "These standards require a higher level of client reporting and emphasise the importance of transparency, performance attribution, and fair fees."
The survey also reveals a disconnect between what managers see as the biggest obstacle to raising capital and what investors view as the biggest obstacles to allocating more to private equity. Half of managers polled see investor fear and reluctance as their biggest obstacle, followed by performance (22 per cent), and liquidity concerns (13 per cent). Investors, meanwhile, pointed to liquidity terms and risk concerns as their biggest obstacles, followed by poor performance and high fees/cost. Fear and reluctance was viewed as one of the three biggest obstacles by a mere seven per cent of investors polled.
In terms of what steps they are taking to attract larger institutional mandates, managers are more in line with what investors said they find appealing. The majority of managers polled (61 per cent) said they have increased reporting transparency, 48 per cent said they have offered graduated fees based on the size of the mandate, and 13 per cent have offered reduced lock-up periods. Similarly, graduated fees were pointed to as most appealing by 39 per cent of investors, followed closely by increased transparency (33 per cent), and reduced lock-up periods (28 per cent).
