Preqin’s Investor Intelligence currently tracks over 4,600 active investors in private equity funds, with many looking to make new commitments over the next 12 months and to form new relationships with fund managers they have not previously worked with. Although investor appetite for private equity remains strong, LPs are increasingly looking at new ways to access the asset class in order to compliment and add value to their existing portfolios. Growing numbers of LPs are awarding separate account mandates and looking at co-investment and secondary market opportunities.
At present, 55% of LPs tracked by Preqin are either actively investing through separate accounts or are considering doing so. This method of accessing the asset class is attractive to LPs as it allows investors to customize their portfolios, to gain exposure to particular sectors and regions, and allows investors to have more influence over their portfolio compared to traditional fund investments. It is of interest to fund managers to offer separate accounts in order to form close relationships with LPs. Public pension funds account for 43% of all investors looking to invest through a separate account, followed by private sector pension funds (16%), foundations (7%), superannuation schemes (7%), endowment plans (6%) and government agencies (5%). It is perhaps unsurprising that public pension funds represent the greatest proportion of LPs investing via a separate account, as this type of investor includes some of the largest in the asset class, with enough capital for a separate account to be feasible. Indiana Public Retirement System recently issued an RFP for a single manager to run a $150mn separate account mandate. The programme will focus on funds which are either based in Indiana or are planning to make a significant impact in the region.
Co-investing is also becoming increasingly popular amongst LPs, with 16% of LPs tracked by Preqin actively co-investing alongside GPs, and a further 4% considering doing so. Co-investments often reduce the costs associated with investing in private equity funds, and offer the potential for higher returns, as well as allowing LPs to strengthen their GP relationships and build up their knowledge of the deals process, making this type of investment an attractive option for many investors. Fund of funds managers account for the largest proportion of investors with an appetite for co-investment (22%), followed by public pension funds (12%), insurance companies (8%), asset managers (7%) and private sector pension funds (7%). Employees' Retirement System of Texas is one such public pension fund with an appetite for co-investing. In FY 2012, it made four co-investments totalling $36.5mn, and plans to follow a similar strategy in 2013.
Accessing the asset class by purchasing fund interests on the secondary market is another attractive choice for investors. This option may give LPs access to funds they may not have been able to commit to during the fundraising process, and also diversifies their portfolios by gaining exposure to funds across different vintage years. Preqin’s H2 2012 Investor Outlook Report reveals that 29% of LPs are looking to increase their activity on the secondary market in 2013.
Overall, a number of LPs tracked on Investor Intelligence are looking to make commitments to the asset class over the next 12 months and form new GP relationships. While this is encouraging for managers that are looking to secure new LP commitments, it is important to recognise that LPs are also looking at new ways to gain exposure to the asset class, such as separate accounts, co-investments and the secondary market, in order to gain more control over their portfolio and to forge closer relationships with GPs.