The famous foreign policy dictum “Trust, but verify” could also be the motto of private equity limited partners (LPs), according to a report from eVestment highlighting LP due diligence trends.
In the global survey, while 72 per cent of LPs said they often trust the high-level performance numbers provided by private equity general partners (GPs), 75 per cent of LPs said they always or often recalculate those manager-provided numbers as part of their due diligence process.
As one survey participant said, recalculating those numbers is “a required process as part of both fiduciary responsibility and our own understanding.”
Another said: “Every once in a while, you’re going to find something that doesn’t quite makes sense, so it’s important to go through the process.”
Highlighting LPs’ desire for standardisation in GP performance reporting, 73 per cent of respondents disagreed with the statement “It is easy to compare one fund manager’s performance numbers with another on a fair and consistent basis.”
Five per cent strongly disagreed with that statement. Only 22 per cent agreed and no respondents strongly agreed with that statement. Institutional investors are also undertaking more due diligence in general on private equity investment decisions.
Forty-three per cent of respondents are increasing their amount of quantitative due diligence and 61 per cent are increasing their amount of qualitative due diligence.
“Private equity is attracting more interest from institutional investors and those investors have increased requirements for standardised information and due diligence,” says eVestment director of private equity solutions Graeme Faulds. “With the information needs of LPs increasing, GPs who hope to win mandates need to be prepared to be transparent with their past performance.”
According to the survey, LPs with less private equity assets under management (PE AUM) say they are more trusting of manager-reported numbers. Eighty per cent of LPs with less than USD1 billion PE AUM said they often trust performance, compared to only 44 per cent of LPs with more than USD5 billion PE AUM.
In addition, a vast majority of LPs (93 per cent) want private equity fund managers to create value at portfolio companies with operational improvements, while very few were interested in value creation through financial engineering or market timing (21 per cent for both – respondents could pick more than one answer).
Also, for the majority of LP respondents, due diligence levels don’t waiver when evaluating re-investment decisions. Sixty per cent of LPs carry out either the same or more due diligence on a manager they are re-investing with compared to a manager that is new to them. Just over two-thirds (67 per cent) of survey respondents carry out public market equivalent (PME) analysis, and half of them plan to increase their use of PME.
The online survey was fielded to LPs in North America, EMEA and Asia, with respondents’ total assets under management over USD3.4 trillion and private equity assets under management totalling over USD140 billion.
In addition to presenting the overall results, the survey parses results by geography and investor type and features a variety of verbatim quotes from survey participants who were contacted and interviewed by phone.
