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Investors demand greater transparency from private equity managers

Institutional investors remain committed to private equity investing, but seek greater portfolio transparency and higher quality reporting from managers amid growing liquidity and performance concerns, according to a survey by SEI.

In a report on the survey’s findings, SEI asserts that private equity managers who standardise and institutionalise transparency practices will be most likely to retain and capture assets because they will create efficiencies while delivering a more consistent and enhanced client experience.

The survey, which was completed by senior investment professionals at 51 organisations ranging in size from less than EUR330m (USD500m) to more than EUR13bn (USD20bn) in assets, revealed that more than 90 per cent of institutions planned to either increase or maintain their allocations to private equity in the coming year.

The majority of those polled still see private equity as a viable source for potential return (73 per cent) or as source for diversification (69 per cent) despite the fact that private equity activity has remained sluggish this year, while the public markets have rallied sharply.

Most participating organisations were foundations, endowments, or public pension funds.

"Private equity fundraising has stalled for the past 18 months, but the good news for managers is that institutions remain firmly committed to the asset class," says Phil Masterson, managing director for SEI’s investment manager services division. "With that said, investors do have concerns — and these concerns aren’t transitory, but rather represent an evolution in investor expectations. Investors are seeking transparency of holdings, valuation methodology, and investment processes, as well as more comprehensive, timely, and independent reporting. While managers may not need to provide the same level of transparency to all clients, they will need to instill best practices across their business in order to attract and retain institutional assets."

Not surprisingly, in the wake of the recent global financial crisis, liquidity risk was cited as a primary concern by the majority of investors (62 per cent) followed by poor performance, both absolute and relative (58 per cent).

When rating the criteria most important in selecting a private equity manager, the top three responses were quality of management team, clarity of investment philosophy, and sector expertise.

The next three most important selection criteria were compliance infrastructure, portfolio transparency, and quality of reporting and communications, demonstrating the increased emphasis institutions are placing on transparency. Underscoring the point is the fact that those criteria rated significantly higher in importance than investment performance and fees.

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