Using separate accounts as a method of sourcing capital presents an array of advantages, not just from an LP perspective, but also from a GP standpoint. GPs can build a potentially rewarding long-term relationship with a large investor, allowing them to develop a track record in a particular region, industry sector, or investment strategy that they might never have accessed or utilized before.
Preqin’s Funds in Market online service shows that the establishment of separate accounts reached an all-time high in 2013, with 118 managed accounts set up, totalling $34bn in aggregate capital and averaging $326mn per mandate. The largest separate account established in 2014 amassed $1bn, whereas six over $1bn were awarded in the preceding year, collecting $11bn.
Of the separate accounts formed in 2014, nearly $9bn was awarded to fund managers for country-specific investments, with accounts focused on investing in the US ($3.8bn), India ($1.7bn) and the UK ($1.2bn) securing the largest proportion of capital. Separate accounts investing across more than one continent are also common, having amassed $5bn. These managed accounts are usually awarded to established managers with a presence and track record in investing across more than one region.
As the private equity asset class continues to evolve, customized investment products have gained greater traction over recent years. Account mandates have gained momentum during a time when GPs are finding it more difficult to raise funds, mainly due to investors seeking lower, more justifiable fees and greater control over their respective private equity portfolios. In turn, this arrangement allows GPs to gain the trust of investors, allowing for the creation of stronger relationships with regular investors of private equity and a more secure inflow of capital for future investments.