BLOG: Institutional investors need more than returns
22nd Feb 17
A wave of private equity (PE) and venture capital (VC) firms is set to raise new funds at levels not seen for a decade – but the demands of institutional investors are rising in tandem. What will it take to meet them?
Long-term focused institutional investors and private equity firms make natural partners. But today’s superannuation sector is vastly different, doubling in size since 2006-07 when investors committed more than $8 billion to PE and VC firms.
Today’s super fund, sovereign wealth fund and pension fund landscape has been radically reshaped by the global financial crisis and a raft of new regulations. Institutional investors expect partners who are more transparent and engaged than in years past. They want more control while maintaining a keener on eye on costs in the MySuper era.
The GPs that can meet these needs by tailoring their offer will have far more success raising capital than those effectively selling a ready-made product. This involves understanding the culture and perspective of institutional investors by grappling with their issues including governance, reporting and liquidity.
Many institutional investors want more than a slice of a fund – they want the ability to make co-investments on assets that meet their specific needs. It allows institutional investors to increase their exposure to transactions where the governance regime, reporting, and cash flow is far more tailored to their own portfolio needs.
This can ultimately help them achieve underlying goals such as raising their exposure to growth assets while lowering costs. With this increasingly common approach, the variety of structures and choices between institutional investors and PE and VC firms is limited only by their creativity.
The desire of institutional investors to boost control, cut fees and customise their exposures is nowhere more apparent than in the uptick of conversations about bringing asset management in-house.
However, PE is the least likely asset class to be in-sourced according to a 2015 SuperRatings survey (with just 6 per cent of super funds managing private equity in-house compared to 57 per cent of funds managing cash in-house). This is a clear recognition that private equity is a unique asset class that requires significant long-term skill and expertise to generate the best returns and manage risk.
Institutional investors acknowledge how difficult it is to attract and retain top talent. This is another opportunity for GPs to cement strong and deep relationships with institutional investors while helping them to increase the knowledge and capabilities of their own ever-growing investment team.
These relationships work both ways as a number of well-known PE firms are undergoing generational change, handing day-to-day management to new senior executives. In the vast majority of cases this has been handled well and is another positive sign of our maturing local industry which is entering its third decade.
How will the next generation of fund managers cope with the dynamics of today’s market and what can they bring to the table to set themselves up for long-term success?
Institutional investor demand clearly remains strong. Now, as the cycle now turns back to fundraising, for some of the PE and VC firms, the partnership between GPs and investors is becoming stronger than ever before.
Yasser El-Ansary will moderate a session discussing this topic at the 14th Annual Private Equity and Venture Forum held in Sydney March 1-3. AVCAL Members receive a 10 per cent discount, simply register here.
Author: Rick Baker, Co-founder, Blackbird Ventures.
Originally published on Blackbird Ventures' blog on 6 March 2017.
Author: Yasser El-Ansary, Chief Executive, AVCAL