Grappling with private equity
Of the 24 respondents to this month’s Off The Record survey that hold private equity investments, 15 were happy with the number of individual fund commitments that their fund had in its portfolio. Of these, four felt they needed to re-balance the strategies. A Danish fund commented: “Investment costs have become more of a focus point, both among the press and members, in this low-return environment and, thus, fund of funds look expensive (irrespectively of returns).”
Nine respondents were not happy with the number of individual fund commitments that their fund had, and five thought they had too many. “We are in a long-term process of reducing exposure to private equity,” said a Norwegian fund. “We are evaluating what the correct exposure should be. Not concluded yet, but definitely lower than the current level.”
Of those that thought they had too many commitments, three stated their fund had over-diversified its commitment to private equity, one said that funds had outlived their expected cycle because of the difficult operating and exit environment, and one highlighted the increase in the relative share of private equity due to sales of assets elsewhere in its portfolio.
Four felt they needed to make more fund commitments, and a UK fund stated: “A number of existing funds are in run off, as is a secondary acquisition, as part of a deficit reduction programme.”
Given the lack of balance revealed by some investors, it is no surprise that 12 respondents thought the industry could innovate to help institutional investors better manage their portfolios of private equity commitments, believing flexibility to be desirable, even in illiquid portfolios.
A UK fund said it would like to see “more co-investment with lower fees, [and] less duplication of fees in fund of funds layering” from the private equity industry to help with portfolio management. However, eight disagreed, viewing private equity to be long-term, illiquid commitments by nature.
One well-established mechanism for dealing with some of these problems is the secondary market for private equity fund interests. Four respondents said their fund would consider selling fund interests into the secondary market, although five would not. “[The] discounts are too deep and we are not that desperate for liquidity,” said a UK fund.
The existence of such discounts should make secondaries attractive to buyers – 10 respondents said they would consider buying in the market, with a further six saying they had already done so. Nonetheless, that still left 11 respondents stating that their fund would not consider buying fund interests from the secondary market.
The vast majority of respondents – 17 – commit 5% or less of their total assets to private equity. A further five had committed between 5% and 10% and two had committed between 10% and 15%. None had committed more than 15%.
Nine respondents invested in private equity mostly via direct fund commitments, with a small fund of funds commitment. Six did entirely via funds of funds, five invested mostly via funds of funds, with a small number of specialist direct fund commitments, three roughly equally via funds of funds and direct fund commitments, with only one allocating entirely via direct fund commitments.
Most respondents – 16 – had investments in 15 or fewer funds. However, five investors were committed to more than 30 funds and one of those held more than 100.