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Private Equity GPs Improving Transparency To LPs Delight

The proportion of LPs which are satisfied with the transparency of their GP’s disclosures and communications stands at an all-time high, according to the results of a new survey produced by global private markets secondaries firm Coller Capital.

The summer 2020 edition of Coller Capital’s twice-yearly Global Private Equity Barometer says that 82% of LPs were satisfied with their private equity managers’ communications and transparency efforts, up significantly from a low of 39% in the summer of 2012. The survey results also suggest that Limited Partner Advisory Committees do a good job, with 78% of respondents holding this view.

“GP transparency and well-functioning LPACs are critical, especially during times like we’re in now,” said David Jolly, a Partner at Coller Capital in London. “In terms of transparency, LPs are demanding more from their GPs and GPs increasingly recognise that responding to those LP needs is in their best interest. I’m not surprised the numbers are higher as there has been improvement.”

It’s not all rosy for PE managers, however. The survey also suggests that LPs don’t think that GPs are taking climate change seriously enough, with 77% of Asia Pacific LPs and 65% of European LPs holding that view, along with nearly half (47%) of North American LPs.

“Climate change remains a vexed and volatile topic in the investor community,” said Jeremy Coller, Chief Investment Officer of Coller Capital. “In much of the world there is limited agreement on what needs to be done, even within LP organisations. That said, best practice is contagious in private equity – step back, and the direction of travel is clear.”

Jolly adds that in future, this might have an impact on capital raising, and PE GPs should be taking this more seriously.

“This will have an impact on PE allocations,” he said. “Clearly, LPs don’t think that GPs are focused on it enough.  With climate being part of LP’s decision making, GPs will realise that this is something they need to address better than they are doing currently. Good GPs will be thinking about this anyway – climate change is a genuine risk and GPs should be evaluating the potential impact of climate change and the associated regulations on their portfolio companies.”

The current economic challenges brought on by the lockdowns imposed by governments the world over have hit private equity firms doubly hard because, in many cases, PE firms and/or their portfolio companies don’t qualify for government-sponsored financial support. The role of the operating partner to support the portfolio companies of PE firms has arguably never been more important, but perhaps surprisingly, 35% of LPs say that more explanation about the role and the value of the operating partner(s) at PE GPs would be helpful.

“GPs could communicate a little more about what their operating partners have done or are doing,” said Jolly. “However, it’s important to clarify that LPs are simply asking for a little more. They’re not saying that PE GPs don’t offer explanations about the role of the operating partner.”

Other observations from Coller Capital’s new Barometer include 51% of LPs saying that geopolitics will have a material impact on the investment strategies and asset allocations of PE and VC funds in the coming years, and almost half – 47% - saying that political risk in emerging markets is increasing (only 5% suggest it is decreasing), with Russia, China, MENA and Latin America being the areas with the highest risk. LPs also see PE as a source of ‘creative disruption’ – i.e. they think that private equity modifies the competitive dynamics in sectors where it invests.

In the hedge fund industry, it’s well understood that the larger investment managers are taking an increasing share of the assets coming into their industry, and Coller Capital’s Barometer suggests that this will be true of the private equity industry as well, with 73% of respondents saying that the largest GPs will raise an increasing proportion of total PE commitments in the future. Jolly says that a difference is that the private equity industry is growing and offers encouragement for smaller and new private equity managers coming to market.

“LP needs are evolving with regards to operational due diligence and capabilities across the board. Larger GPs can invest in these areas to respond to the needs of large LPs. LPs see their own workload increasing, and they are making more decisions, so for some having fewer GP relationships could help bandwidth. However, LPs overall are expecting to increase the number of their GP relationships in the next three years [39% of respondents expect an increase vs. only 16% which expect a decrease]. That willingness is good for the ecosystem of the industry,” he said.

“The door is very much open to differentiated smaller GPs and start-ups. The private equity industry is still growing.”

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