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Private equity allocations will hold steady or rise in coming years

Nearly four out of five private equity investors say their allocations to the asset class will remain at current levels or increase in the coming years, while most private equity firms are optimistic about their future, according to research released by BNY Mellon.

The primary focus of the paper, entitled “Private Equity Faces the Future: Candid Views from the Market,” is to explore the changing relationships between limited partners and general partners and how this evolving dynamic will impact the market.

While economic events of 2008-2009 tested assumptions about private equity performance as well as long-standing relationships between LPs and GPs, research shows that private equity remains an attractive asset class.

Still, both sides are focused on negotiating ways to address the demands for more clarity on returns, more information about investments, and lower fees.

“While LPs want more private equity, they also want ‘better’ private equity, which means aligning their interests with GPs, as well as improved transparency and reporting,” says Brian Ruane, chief executive officer of BNY Mellon’s alternative investment services group. “In turn, GPs need to adapt to this new environment, which started taking shape even before the credit crisis, by building a sophisticated infrastructure to service investors throughout the economic cycle.”

Seventy nine per cent of LPs say their private equity allocations will hold steady or rise in the years ahead, but average commitment sizes have declined.

Asian GPs were the most bullish about the future of the private equity industry with a score of 4.29 (five being most bullish and one being least bullish), followed by North America (3.83) and Europe (3.62).

Asian LPs, many of them newer to the asset class, are enthusiastic about upcoming PE opportunities but concerned by tax challenges and often constrained by cautious board overseers. In turn, many North American and European GPs suggest they will head to Asia for the first time to raise funds.

LPs and GPs alike expect that management fees and transaction fees will be of highest priority in upcoming partnership term negotiations.

GPs are receiving more extensive requests for information about portfolio companies and the firms themselves. Most expect a fundamental change in the detail and frequency of investor reporting.

Among many regulatory and tax proposals, GPs globally are very concerned about the potentially expensive and restrictive requirements of the proposed European Union Alternative Investment Fund Manager directive. GPs at small- and medium-sized private equity firms tend to expect a greater and potentially more burdensome impact from proposed tax and regulatory changes than do GPs at the largest firms.

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