The benefits for investors of having a separate account mandate with a fund manager include the ability to have more direct control over their activity in the private equity asset class, which consequently allows them to add value to their portfolios. Additionally, the arrangement can benefit LPs by allowing them to solidify relationships with their fund managers and negotiate better terms. According to Preqin’s Funds in Market, 79 separate accounts were awarded to fund managers by LPs in 2014 YTD, with an average size of $360mn. This displays that it is not always possible for the smaller LPs to access private equity via a separate account due to the large commitment sizes.
Preqin’s Investor Intelligence currently tracks 5,410 investors in private equity, out of these, 8% will invest or will consider investing via a separate account mandate. These LPs have a combined $17.6tn in assets under management, and an average of $1.6bn currently allocated to private equity.
As can be seen in the graph above, public pension funds are the most prevalent type of investor, representing 25% of all LPs showing a preference for separate account mandates. This may be due to public pension funds’ position as some of the most sophisticated investors in private equity with the largest typical fund commitments, therefore making separate accounts a more practical option. Private sector pension funds are the second most prevalent investor type in separate accounts, accounting for 12%, followed by insurance companies (9%), foundations (8%) and endowment plans, which make up an additional 7%.
In terms of geography, 54% of separate account investors are based in North America, 26% in Europe, 15% in Asia-Pacific and the remaining 5% are investors based in South America and various other regions.
One investor that has recently invested via a separate account mandate is California Public Employees' Retirement System (CalPERS). The $300.3bn public pension fund has hired Sankaty Advisors to run a $500mn separate account on its behalf. The separate account will focus on distressed debt investments in North America and Europe. Similarly, State Oil Fund of the Republic of Azerbaijan (SOFAZ) is another example of an investor that actively invests in separate accounts. The $35.9bn sovereign wealth fund is looking for a manager to oversee a $200mn separate account.
In June 2014, Preqin surveyed 100 private equity investors globally for its bi-annual Preqin Investor Outlook: Alternative Assets, H2 2014 report. It found that 22% of respondents had previously awarded separate account mandates to fund managers. Sixty-eight percent of these stated that separate account mandates were to become a permanent part of their investment strategy going forward, with a further 32% stating that they are considering making separate account mandates part of their strategies in the future. This indicates that as the private equity industry continues to mature, we can expect that more LPs will seek to invest in separately managed accounts.