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European PE execs increasing personal capital commitments

More European private equity firms are increasing the personal capital executives devote to their funds, according to new research from Investec.

The firm’s annual GP Trends report, now in its sixth year, captures the views of 81 senior private equity professionals in the UK and Europe, with approximately €58 billion in total commitments under management.
29 per cent of respondents said they expect to commit between 2 per cent and 3 per cent of the overall capital as a team, up from 15 per cent of respondents in last year’s survey.
A total of 11 per cent expect to commit between 3 per cent and 4 per cent, up from about 4 per cent of respondents last year. 12 per cent expect to commit more than 5 per cent, a marginal increase on last year’s results. This bears out a trend of increased “skin in the game” that Investec’s Fund Finance team has already noted in the market. It is one which presents significant challenges for those whose capital is tied up in non-liquid assets, with a commitment of just 2 per cent across funds surveyed equating to than €1.16 billion.
The survey revealed that more than half of respondents do not currently have the liquidity to meet their commitments: 27 per cent intend to reinvest carry from previous funds, 14 per cent expect to resort to external financing and 10 per cent do not know how they will raise the funds. However, with sale activity showing signs of slowing and timing of carry payments becoming less reliable, Investec has seen that structured external financing could be an increasingly important route to meeting commitments, as well as leveraging up personal returns.
While in previous years increased commitments have reflected investor pressure to improve alignment with LP interests, this is not the case today. Investec’s GP clients cite their
growing confidence in the long-term prospects of the investment market, the availability of sponsor-friendly debt and improved visibility on portfolio companies’ earnings.
Career satisfaction within the industry is at an all-time high: more than 90 per cent of respondents are at least as happy with their careers as they were a year ago, up from 82 per cent in the 2014 report. 82 per cent are confident in their prospects for career progression and only 13 per cent are considering leaving their current firm in the next year, marginally down from 14 per cent last year.
While long-term indicators are good, there are some hurdles to overcome in today’s market: as Investec’s Fund Finance team has seen throughout the year, improving economic indicators, readily available debt at affordable levels and competition from new acquirers in both the trade and sponsor communities are all having an impact on the business. 72 per cent of respondents expect competition for and pricing of assets to be a major challenge in the year ahead, although only 39 per cent expect it to be a major issue. 53 per cent see it as just one challenge out of several, while a small minority of 8 per cent are not concerned by valuations at all.
Succession planning has been one of the biggest challenges for private equity firms in recent fundraising cycles and is a theme frequently raised by the Fund Finance team’s client base.
While more than two-thirds (68 per cent) of respondents said clear succession planning was critical to long-term succession for their firm, they are less certain about how this is being achieved. More than a quarter said their firms’ current plans for generational change are inadequate, although a majority (57 per cent) believe the right preparations for succession have been made. Whether this is being communicated to LPs is less clear: only 41 per cent could positively say that LPs are happy with their succession plans and while just 5 per cent said LPs were definitely not happy, 53 per cent were unsure either way.
The findings come as half of the respondents cited pressure from investors as the primary cause for change to fee structures. Indeed, 6 per cent said they would change their management fee structure imminently with 14 per cent intending to in the long term, while more than a quarter (26 per cent) said the industry should change the management fee structure. Whilst it will likely take time for these changes to filter through to the mainstream of the industry, they will require individuals and funds alike to think about how they manage their cash flows through the transition.
Simon Hamilton, Global Head of Investec Fund Finance, says: “The sixth edition of our Investec Fund Finance GP Trends research shows clear confidence in current favourable market conditions and a willingness to increase personal exposure to investments, though caution remains in terms of structuring personal contributions.
“Whilst senior private equity professionals acknowledge we are operating in a competitive environment, it is clear they believe it is also one which offers meaningful opportunities for value creation and fund finance is becoming an increasingly strategic tool in securing assets.
“We believe our deep understanding of the opportunities and challenges facing the industry will enable us to continue to deliver innovative, marketing leading solutions to support further growth.”

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