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Investors have high hopes for private equity and high expectations of managers

With sluggish returns projected for many asset classes, institutional investors are turning to private equity as a source of alpha, but expect greater transparency, reporting and risk management from managers, according to a global survey report released today by SEI in collaboration with Greenwich Associates.

 

The survey report, entitled “The Logic of Fund Flows, points to a need for private equity managers to demonstrate better reporting and risk-management measures to retain and gain assets among an increasingly demanding institutional investor base.  

The survey, of more than 400 institutional investors, consultants, and fund managers, revealed that while more than a quarter of those surveyed (26 per cent) plan to increase their private equity allocations over the next 12 months, investors and consultants differ on their investment objectives when it comes to private equity. More than two-thirds of investors (68 per cent) point to return potential as their primary objective as opposed to 10 per cent of consultants. Fifty per cent of consultants, meanwhile, said diversification was their primary investment objective as opposed to only 18 per cent of investors. “As investors are looking to achieve higher returns in an increasingly challenging return environment, private equity is coming back, but standards are higher across the board,” says Rodger Smith, Managing Director at Greenwich Associates.

Beyond facing different priorities from different constituencies, the survey suggests that the criteria for evaluating managers have become more demanding. Respondents still point to the traditional three Ps of People, Investment Philosophy, and Investment Performance as the most important manager selection criteria, but the fourth P, Process, is becoming increasingly important. To that end, investors ranked portfolio transparency, fees, and quality of reporting and communications as very important factors in the selection process as well.

Phil Masterson (pictured), Senior Vice President and Head of Business Development, Europe, for SEI’s Investment Manager Services division, says: “This survey confirms what we’re hearing from our clients–investors are demanding more from managers across asset classes. While investors see private equity as an area of opportunity, they expect more from the managers in which they invest. They want greater transparency, better reporting, and lower fees. Those can only be achieved with greater operational effectiveness and that’s what it takes to compete in the ‘Era of the InvestorTM’.”

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