2022 LP Survey Insights on Alternative Investments Produced in association with - AVCJ Private Equity & Venture Forum
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SS&C Intralinks® 2022 LP Survey Insights on Alternative Investments Produced in association with
Editor’s Note
Meghan McAlpine
Welcome to the sixth annual SS&C Intralinks LP Survey Sr. Director, Strategy &
produced in association with Private Equity Wire. Product Marketing,
Alternative Investments
The intent of this report is to gauge how investors are
thinking about their general partner (GP) relationships,
in addition to highlighting emerging themes that might
help inform how investment firms do business over
the next 12 months. For example, what are limited consultants (19 percent). At 45 percent, North America was
partners’ (LPs) views on the size of manager they plan the largest geographic representation, with 35 percent of
to allocate to? What are their views on transparency LPs based in EMEA and the remainder in Asia Pacific and
and reporting, and how does this factor in to Latin America.
environmental, social and coprorate goernance (ESG)?
As GPs think about growth and seek ways to stand out from
How do they view the technology capabilities of GPs?
the crowd in the fast-paced world of global alternative
And what are their overall views on the performance
investments, any insights they can garner on the current LP
of alternative assets, both at an industry-wide level,
mindset are likely to be advantageous. We hope this report
asset-class level and sector-specific level?
can help provide a roadmap as managers look to evolve and
This year, 199 global investors were surveyed for their improve the GP/LP relationship.
views on the performance of alternative investment
Our thanks to the LPs who kindly gave their time to
funds over the last 12 months and what their allocation
complete this year’s survey. Without the support of the
programs might look like for 2022.
global institutional investor community, we could not have
Family offices accounted for the biggest LP category, produced the findings presented in this report. Your insight
representing 32 percent of investors, followed by is greatly appreciated.
fund-of-fund managers (21 percent) and investment
2Executive Summary
• There is a consensus among LPs that their • LP sentiment is also mixed concerning the
alternative investments met or exceeded their leveraged buyout space, with the majority of LPs
performance expectations in 2020. either somewhat optimistic on the one hand, or
cautious on the other hand. Managers who focus
• As such, three-quarters of LPs plan to increase on clearly communicating their operational value
their allocations over the next 12 months, with strategy will likely assuage LP concerns in today’s
private equity (PE) and venture capital (VC) at the high-valuation marketplace.
top of their lists.
• Technology could still be further embraced to
• More than half of LPs (55 percent) plan to increase improve transparency. LPs appear to be happy with
their number of GP relationships. the progress GPs have made, but they would like to
see improvement on due diligence and ESG data.
• Over 80 percent of LPs feel it’s important that GPs
embrace technology to improve the quality of • Sixty-nine percent of LPs agree or strongly agree
portfolio reporting. that market-dislocation opportunities, in the
wake of the pandemic, should prove beneficial
• LP interest in PE secondaries is somewhat mixed. Those
to alternative assets over the next 12 months.
who do plan to increase their exposure see opportunities
for more LP-led deals over the second half of 2021.
Performance GP Selection Transparency,
Sentiment Insights Intelligence Reporting and ESG
Page 4 Page 9 Page 15
Asset Macro and
Allocation Trends Sector Outlook Conclusion
Page 20 Page 23 Page 25
3Performance Sentiment Insights
The last 18 months have proven to be a defining Hedge funds certainly had a standout year in 2020.
moment for most alternative assets, with private equity On average, they returned 11.02 percent according to
and hedge funds, in particular, generating resilient eVestment, the highest level since 2009 when the average
performance in the wake of the COVID-19 pandemic. It
return was 19.44 percent.
has been a period for active managers to demonstrate
their true worth to institutional investors. “Last year was an extraordinary year and one that exceeded
This is reflected in overwhelmingly positive sentiment our expectations,” comments Yehuda Spindler, managing
among investors. When asked what their performance director and head of research at Optima Asset Management,
appraisal was for 2020, 80 percent of LPs confirmed one of the industry’s oldest fund-of-hedge-fund managers.
that their alternative asset portfolios had either met or
exceeded their performance expectations.
Survey Methodology
Types of investors surveyed Surveyed investors by geography
`Family Wealth Office
Fund of Funds 35%
Consultant/Advisor Europe, the Middle
Pension East and Africa 15%
Insurance Asia Pacific
Endowment/Foundation
Sovereign
Bank
Local Government Authority
5%
Latin
America
45%
North America
4“I think the outlook remains quite strong. It doesn’t look like
the trends that hedge funds benefited from last year are
going away anytime soon, which gives us a lot of confidence
and conviction that there will be positive momentum for
“On the family office and wealth manager alternatives in general.”
side, they’ve been expanding their
allocation to hedge funds and in the case of Hedge fund performance has continued to stay strong
the latter, they’ve been building platforms in 2021, gaining more than 10 percent through June;
to give their own end clients a better set of the industry’s strongest performance in 22 years. Now,
hedge fund managers to choose from. We managers are positioning for a dynamic performance
see a number of wealth manager clients environment heading into the second half of the year,
being proactive and expanding their hedge
shaped by ongoing COVID concerns.
fund rosters. We are also seeing new users
of hedge funds -- including pension plans -- Private equity and venture capital have also proven their
turning to them for the first time.” worth over the last 12 months. So much so that 44 percent
of LPs cited private equity as having delivered the best
‑ Toby Goodworth, bfinance
risk-adjusted returns, with 18.6 percent referencing venture
capital. (See Figure 1.)
Figure 1: Within alternatives, which of the following asset classes generated the best risk-adjusted returns?
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Private Equity Venture Capital Private Debt Hedge Funds Real Estate Infrastructure Commodities
5Francois Massut is head of private equity funds at Such has been the desire to seek out good quality buyout
Peugeot Invest, a French-listed investment company. opportunities that for the first time in history, European
As a listed family office, it gives an investor like Peugeot EBITDA multiples last year were higher than in the U.S. at
Invest the best of both worlds (i.e., the flexibility of a 12.6x compared to 11.4; the highest ever.
family office and the organizational structure of an
With Technology and Healthcare featuring prominently in
institutional investor).
deal activity, this perhaps also explains why this year’s survey
Its investment activities reflect and draw upon the saw venture capital feature so strongly, given the amount of
industrial experience of the Peugeot family, and cover a VC activity in those sectors. Year-on-year, the survey figures
range of diversified assets, mainly composed of direct for VC increased from 11 percent to 18.6 percent and suggest
minority stakes, private equity vehicles, co-investments that this is an increasingly important area of the alternatives
and Real Estate. industry among LPs.
“We prefer to delegate to specialized sector-focused “Despite the uncertain macro-economic environment due
GPs. Since we began building a program of investing in to the global pandemic, our private equity portfolio has
growth tech buyout funds six years ago, we have seen performed very well,” confirms Daniel Dupont, vice-chair,
the resilience and performance of these sector-focused Europe at Northleaf Capital Partners (Northleaf), a global
funds — in particular during the pandemic last year,” private markets investment firm with USD 17 billion in
Massut confirms. capital commitments.
The median 10-year annualized IRR for global buyout He continues: “Our investments grew 24 percent overall
funds last year was approximately 10 percent, according in 2020, despite a negative return in Q1 due to COVID. This
to Bain & Company’s Global Private Equity 2021. More was due, in part, to being relatively well-positioned heading
revealingly, the average gross pooled multiple on into the pandemic. Our investment team works very closely
invested capital (MOIC) for 2020 was 2.3x; down on 2.6x with our portfolio strategy and analytics team during due
recorded in 2019 pre-COVID-19, but higher than the 2.19x diligence and throughout the life of our investments and we
average for the period of 2015 to 2019. had minimal exposure to the industries most impacted by the
6pandemic. In addition, our global investment strategy, you should be well-positioned to invest in both parts of the
investing in primaries, secondaries (fund positions and market; public and private.
GP-led transactions) and direct investments helps build
“Our goal will be to differentiate between which managers
an attractive risk/return profile for our investors. We
have competitive advantages on the public side, and those
expect to see this strong performance extend
on the hybrid side; not everyone is capable of successfully
through 2021.”
making that leap.”
One intruiging trend that could continue to accelerate is
LPs set to increase their alternatives exposure
a convergence between the hedge fund world and the
PE/VC world. Given the buoyant sentiment among LPs, it is perhaps
unsurprising that the vast majority (approximately three
Indeed, there are many well-known hedge fund
quarters) confirmed that they would be increasing their
managers now running VC programs, including the likes
overall allocation to alternatives over the coming 12 months.
of Tiger Global Management, Philippe Laffont’s Coatue
(See Figure 2.)
Management and Two Sigma Ventures.
According to a new report from research firm CB Figure 2: Do you expect to increase your allocation to
alternatives over the next 12 months?
Insights, Tiger increased its investments in Q2 2021
by eightfold from the same quarter a year earlier to 81,
making it the top VC investor.
28%
“Some hedge fund managers have been operating in the
VC space for quite some time but we continue to see
72%
new entrants,” observes Spindler. “The trend is definitely
moving in that direction. If you have the underwriting
and analytical skill set, and data science capabilities,
Yes No
7One-third of LPs expect this to be a three to five percent Private debt does not appear to feature that prominently
increase, although one in four LPs are more bullish on the among those surveyed, despite the very obvious growth in
outlook and plan to increase their exposure by 10 percent this asset class, especially in Europe.
or more. (See Figure 3.)
By the end of 2020, total assets under management (AUM)
had grown to USD 848 billion and are projected to increase
Figure 3: If you do expect to increase your
allocation to alternatives over the next 12 11.4 percent annually to USD 1.46 trillion at the end of 2025,
months, then by how much?
according to Preqin.
40%
35% This makes private debt the third largest among the private
30%
capital asset classes, behind private equity and Real Estate.
25%
20% Despite this, only 10 percent of LPs said they would be
15%
increasing their allocation to private debt.
10%
5%
Thibault Sandret, director, private markets at bfinance, a
0%
leading global investment consultancy, comments on this
1-3% 3-5% 5-9% 10% or more
finding by noting that private debt funds remained resilient
through the pandemic “which was the first large-scale test of
As was the case in last year’s survey, private equity remains
performance for the asset class in a period of market stress.”
the most overweight asset for institutional portfolios.
“This confidence boost, which follows the slow fundraising
“We are going to increase our allocation to alternatives
last year where many investors were in a wait-and-see mode,
over the next 12 months. More specifically, we will invest
means commitments to the asset class are now picking up
in private equity growth tech buyout funds and we plan
pace to maintain target allocations. The level of interest our
to increase our platform allocation in this area,”
institutional clients are currently showing for private debt is
confirms Massut.
possibly at the highest level it has ever been,” states Sandret.
8GP Selection Intelligence
Forty-three percent of LPs confirmed that they favored At Peugeot Invest, Massut confirms that their focus is on
managers on the smaller end of the AUM spectrum last specialists between USD 250 million and USD two billion.
year, overseeing assets between USD 100 million and
“We invested a while ago with one manager with USD two
USD 500 million.
billion in AUM who has since grown to USD six billion. Despite
One-third of investors backed managers with north this, we decided to invest in their latest mid-market fund.
of USD one billion in AUM but only one in 10 LPs We like this GP because they are very sector-focused on
backed managers with USD five billion+ in AUM, as Healthcare and Education and are very close to the
Figure 4 illustrates. U.S. government.”
This theme of backing smaller managers with up to USD 500
Figure 4: What fund manager AUM size did you
strongly favor in 2020? million in AUM on the one hand, with a cohort of managers
running up to USD five billion in AUM on the other hand, is
50%
clearly in evidence for the year ahead, as Figure 5 illustrates.
40%
30%
20% Figure 5: What fund manager AUM size will you be
favoring in 2021/2022?
10%
0% 50%
Less than USD 100 - More than More than 40%
USD 100 USD 500 USD 1 billion USD 5 billion
million in AUM million in AUM in AUM in AUM 30%
20%
Why large-cap managers were less prominent is hard to 10%
surmise, but it perhaps points to the need for portfolio 0%
Less than USD 100 - More than More than
diversification as investors seek to compliment bulge- USD 100 USD 500 USD 1 billion USD 5 billion
million in AUM million in AUM in AUM in AUM
bracket names with smaller, sector-focused specialists.
9One should note, however, that with so much dispersion Let’s connect
of returns among alternative fund managers, getting
To underscore the point about diversification, this year’s
a clear understanding of the return drivers will be
survey reveals that over the next 12 months, more than
paramount for LPs and, in this continued virtual
half of LPs (55 percent) plan on increasing their number of
workplace environment, require them to conduct
GP relationships. Moreover, only eight percent said they
careful due diligence.
would reduce the overall number, further suggesting that
confidence with their GPs remains high on the back of last
year’s performance. (See Figure 6.)
Figure 6: Are you planning to increase, decrease or
maintain the number of GP relationships you have over
“We would much prefer to be with a ‘class A’ the next 12 months?
manager that runs a larger AUM base than
with a ‘class B’ manager that runs a smaller 60%
AUM base. I will say, however, that part of 50%
the challenge of strong performance is 40%
[that] asset levels grow organically. Some 30%
managers who started with USD 500 million, 20%
for example, have seen their AUM grow to 10%
several billion dollars over the last year.
0%
Against that backdrop, we want to continue to
Increase Maintain Decrease
source new managers we think can enhance
our portfolios. We want concentration with
appropriate differentiation, but we certainly When asked about how they think about their GP
don’t want to over-diversify.” relationships with private equity, a London-based leading
private markets investor with over USD 60 billion in AUM
‑ Yehuda Spindler, Optima Asset Management
states: “We are always seeking to blend re-ups with existing
managers with a strong track record and with whom we
have an established relationship, with new and emerging
managers; especially where there are spin-outs of
10high-performing teams from established managers. We The quality of the portfolio management team remains
expect this activity to increase post-COVID. the single most important criterion when selecting
new managers, as investors build out their investment
“Overall, we would expect to have expanded our line-up
programs. Six out of 10 LPs cited this, while five out of
of primary GPs over the next 12 months, in common with
10 LPs selected historical performance as the second
prior years.”
most important criterion. (See Figure 7.)
Figure 7: How would you rank the following when selecting a manager,
with 5 being most important and 1 being least important:
5
4.5
4
3.5
Level of importance
3
2.5
2
1.5
1
0.5
0
Caliber of portfolio Historical performance Fee structure Quality of fund Quality of IT
management team (i.e. prior returns through reporting infrastructure
different economic cycles)
Every investor will have specific selection criteria for Northleaf’s Dupont says that some reasons are extrinsic to
GPs, which will vary on a case-by-case basis, so one the manager, such as the macro-environment climate, the
cannot infer too much from these results. As one LP forecast growth of a certain sector or the existing exposure
remarks: “The reason to pursue a specific investment of the fund Northleaf is investing in.
is weighted using different factors.”
11“Others are intrinsic,” he says, “such as the track record, Figure 8: In which asset classes will you be favoring
emerging managers over the next 12 months?
the experience of the team working together and the
relationship they want to build with Northleaf to meet our
40%
investors’ expectations.
30%
20%
“If you ask me to summarize in one line, it would be a proven
10%
ability to generate and sustain excellent returns accretive
0%
to our programs over a multi-funds period. Our global
Private Venture Hedge Real Private Infrastructure
Equity Capital Funds Estate Debt
platform in private equity, private debt and infrastructure
brings a wealth of network and financial means to invest
“Our program is very mature,” comments Helen Lais,
together. It is important to build trust, cooperation and
managing director, head of primaries U.S., at Capital
have honest exchanges between both parties.”
Dynamics, a leading private markets investor with more
Emerging managers still offer attractive returns than USD 15 billion in AUM. “We’ve been investing in
primary funds since the early 1990s. We’re always looking
As investors seek to expand the number of GP
for that next generation of top performers producing
relationships, identifying fresh talent — including first-
returns, sometimes in excess of established managers.”
time fund managers who have spun out of established
shops — is a key part of their portfolio differentiation. Quilvest Capital also has a long history of investing
in emerging managers, allocating 25 to 30 percent
Emerging managers, which fall into a broad category but
of their primary fund commitments to this category of GP.
for simplicity, we will refer to as any GP with less than a
three-year track record, are firmly on the radar of LPs “We are looking at targeted strategies within the mid-
over the next 12 months. In keeping with the survey market buy-out and growth space with unique angles.
findings, private equity is the most popular asset class These days, we are particularly interested in themes
to seek out these managers, as cited by 37 percent of around ‘transformation’ of business models,” notes
respondents. (See Figure 8.) Jean-Francois Le Ruyet, a partner at Quilvest.
12The main drivers for backing emerging managers
are attractive return potential and the ability to
access more niche investment strategies that more
established GPs are unable to prosecute because of
“We like emerging managers if they have
their size. However, one in five LPs also cited a desire gone through previous market cycles
to access new talent. (See Figure 9.) together; good and bad. We want to see
the resilience and the complementary
skillsets of the investment team.”
Figure 9: What is the main driver behind
allocating to emerging managers?
‑ Francois Massut, Peugeot Invest
40%
30%
20%
10% “We’re not looking to go out of our way to onboard
0% managers with smaller AUMs, We must have the
Attractive Niche Desire to Added More
return strategy access portfolio likely to confidence and conviction they will add value to the
potential options new diversification negotiate
talent better fees portfolio,” they say.
First impressions will count more than ever in this hybrid,
Lais says that Capital Dynamics prefers niche strategies
post-COVID world of virtual and physical meetings.
in certain segments of the market, “such as Healthcare
Technology and Financial Technology, where we believe In a sign of just how far the world has changed over the
specialization is needed. This applies to both emerging last 18 months, when asked whether they would consider
managers and established managers.” investing in managers they’ve never met, on a purely
virtual basis, one-third of LPs replied that they would
Still, the level of competition for attracting assets
“on a limited basis.”
remains significant. One U.S.-based LP confirms
that although they’ve started to onboard a couple of One would never have expected such a response even
emerging managers to complement other parts of their three years ago. It illustrates the extent to which LPs
portfolio, “the bar is extremely high.”
13are comfortable using video conferencing and virtual Indeed, one in five LPs said they would be “happy to do so.”
due diligence to get comfortable with new managers. (See Figure 10.)
Figure 10: Would you consider investing in a fund manager you’ve never
met, in a fully virtual environment, over the next 12 months?
35%
30%
25%
20%
15%
10%
5%
0%
Happy to do so Yes, on a Potentially Probably not Would never
limited basis consider it
At Optima, Spindler confirms that they’ve evolved their forward, we expect to do a combination of both physical
allocation process over the last 18 months given the and virtual meetings as part of our due diligence process.
travel restrictions, but even though they’ve had to rely
We’ve asked our CCO to establish guidelines and
on virtual due diligence, the allocations they’ve made
parameters in terms of bringing managers to our offices;
have been with managers they had already met in
the office environment is going to be a little different
person, prior to the pandemic.
(concerning health and safety).”
“It was more of a continuation of our due diligence in
that respect,” says Spindler. “We’ve started to have
some meetings with managers in person and going
14Transparency, Reporting and ESG
As technology innovation and new solutions continue or “above average”: not exactly terrible, but hardly a ringing
to be embraced by GPs, in a trend that has arguably endorsement. (See Figure 12.)
been accelerated because of COVID-19, this should help
investor relations teams improve the frequency and Figure 12: How would you rate the level of
transparency provided by managers?
quality of reporting.
50%
Only 30 percent of LPs felt that better reporting
40%
analytics would help improve their relationship with GPs,
30%
suggesting that they are broadly satisfied with this aspect.
20%
Nevertheless, there remains a feeling among those
10%
surveyed that the level of communication could still be
0%
improved upon, as cited by 56 percent. (See Figure 11.)
Excellent Above Average Could do Needs to
average better significantly
improve
Figure 11: What would help improve your
relationship with GPs? Dig more deeply, though, and on an individual LP level, things
do seem to be improving. At Northleaf, Dupont explains that
60%
even before the pandemic “we were talking to our partners
50%
on a very regular basis about the portfolios and companies”
40%
and that the COVID-19 situation has further increased
30%
those interactions. “Most managers have been very open
20%
to such exchanges, as the recovery of some companies
10%
has taken some time. Overall, managers were realistic and
0%
conservative in their valuations.
More frequent Better Standardized Social media
conversations report reporting platforms
with portfolio analytics such as ILPA such as “The fact that we all have extensively increased the use of
managers templates LinkedIn
videoconferences to reach out to each other allowed [for]
more frequent communication.” This sentiment is echoed by
This is further reinforced by the fact that three-quarters Lais, who notes an improvement in delivery format among
of LPs rate the level of transparency as either “average” Capital Dynamics’ GPs: “Many of them are hosting quarterly
15portfolio updates — either through reports or conference
calls where we can engage and send in questions in real-
time. That has been a really nice improvement. GPs have
recognized the importance of staying in touch with LPs.”
“We are looking for partnerships and if a
Setting a standard for transparency GP is not open-minded and willing to share
data, we shut the door.”
Kelly Meldrum, partner and head of primary investments
at Adams Street, confirms that many of its GPs started ‑ U.S.-based LP
regular Zoom updates early in the lockdown and “set a
standard for transparency.”
She notes that GPs provided frequent updates on portfolio Understanding the underlying reasons for why some
companies/sectors and over-communicated during a LPs still feel there is a lack of communication can be
turbulent time: “Our confidence in several general challenging. Part of it could be down to LPs not willing
partners increased during this period as a result of their to ask tough questions to a GP and challenge them
information sharing via Zoom and in numerous on transparency. Peugeot Invest’s Massut is of the view
one-on-one conversations.” Meldrum further adds that that some GPs play on the division between LPs, i.e., when
Adams Street has seen evidence of more frequent an investor asks for a change in the LPA and the manager
communication with its general partners over the says, “You’re the only one asking for this.”
last 18 months. “For example, the number of GP
meetings and conversations (excluding annual “We think LPs need to work more collaboratively to have
meetings) increased 27 percent in 2020 over 2019,” an alignment of interests not only on the capital they’ve
Meldrum confirms. “While Zoom isn’t a perfect put to work but on the governance side of the GP/LP
substitute for in-person meetings, it does provide a relationship. Often there are some conflicts of interest
platform for frequent communication with large as well within the LPAC. It tends to be led by the biggest investor
as smaller groups of investors.” in the fund. Often, they are shy and don’t want to ask too
many questions because they want to continue to do co-
Some LPs have, however, experienced mixed results investments with GPs — but when the GP is not present,
with respect to the level of communication, with one there is a lot more discussion.
investor confirming: “We have seen during COVID-19,
GPs who were very transparent on the evolution of their “So in terms of governance, I think LPAC policies and
underlying portfolio companies and some GPs who did processes need to improve. It needs to be a comfortable
the minimum amount.” place for all LPs to ask questions of the GP.
16We see governance best practices in public equities but This aspect of the GP/LP relationship would therefore
we don’t yet have that for private equity,” opines Massut. appear to still need improvement. And while it is hard to
define exactly what it is that LPs consider as “good enough”
Part of the disconnection on GP/LP communication
technology capabilities, it does suggest that managers who
could, therefore, be down to how LPs approach
focus on this aspect of their business will likely improve the
transparency, on a collective basis.
investment experience.
GPs need to embrace technology
At one leading U.K.-based fund-of-fund manager, the house
Investors are unequivocal in terms of the importance they view is that GPs’ data capabilities are improving all the time.
place on fund managers embracing technology. Not only
“We expect our GPs to focus on and invest in this area, and
to raise the bar on transparency but to demonstrate, in
we are broadly impressed with the ongoing evolution we are
more granular detail, how the underlying assets in their
seeing,” they say.
portfolios are performing.
As Figure 13 shows, only one in four LPs said they were
“very satisfied” with the technology capabilities of the GPs
they currently invest with (from a reporting perspective),
with the majority — some 69 percent — stating they were
“One of our U.S.-based GPs is increasingly
only “moderately satisfied.”
using technology such as digital applications,
to accelerate their deal sourcing, execution
Figure 13: How satisfied are you with the technology and value creation. That being said, we
capabilities of the GPs you currently invest with, in
respect of their reporting?
still want to see more transparency from
managers, especially during the due diligence
70% process (i.e., data on how the carried interest
60% is shared among deal partners, on how
50% profitable the management company is).”
40%
‑ Europe-based LP
30%
20%
10%
0% “We encourage GPs to embrace technology and share
Very satisfied Moderately Not satisfied underlying portfolio company data,” states Adams Street’s
satisfied
17Meldrum. “Reporting and transparency have improved over This reflects the sheer diversity of strategies and
time. We prefer to have portfolio company information sophistication of internal operations within the alternative
in order to analyze client portfolios, sector trends, fund manager space, and the fact that investors prefer
performance by geography and other important factors.” GPs to use third-party administrators in some instances
Quilvest’s Le Ruyet offers the following balanced view: more than others. Various factors are likely to play a part
“More technology is obviously nice to have, but on the in this, including the size of the fund, the complexity of the
LP receiving end this also involves new investment in investment strategy and the size of the team. Only 15 percent
technology to be able to cope with new communication of LPs said they had no preference for managers outsourcing
channels, new volumes of data, etc. For now, this is not back-office functions to an independent fund administrator.
easy to implement, as there is no industry standard.” This illustrates the extent to which LPs have gotten
comfortable with outsourced arrangements, which have
Outsourcing gains prominence
arguably been accelerated as a result of remote-working
One way for GPs to ensure they have the right reporting practices over the last 18 months.
and technology capabilities in place is to lean on trusted
ESG insights
service providers, led principally by fund administrators,
many of whom have invested significant resources This year’s survey respondents were asked to rank how
(financial and human) in automating middle- and back- important they regarded the following statement on a
office functions. Institutional investors now recognize the scale of one to five (with one representing the highest level
importance of outsourcing, with 38 percent confirming of importance): “The quality of ESG data is increasingly
it was their preference, but nearly half (47 percent) of becoming a central tenet of our ongoing portfolio
respondents feel that it depends on a case-by-case monitoring process.”
basis. (See Figure 14.)
The average response to this was three, out of five, but again
Figure 14: Do you prefer your fund managers to outsource this is a general finding. On an individual basis, some LPs
their back-office functions to a fund administrator? are more focused on the quality of ESG data than others. It
also depends on the geographic location of investors. ESG
50%
has been a focal point of discussion in Europe for several
40%
years now.
30%
20% “We definitely agree with the above statement, although the
10% quality of data available, especially from underlying GPs, can
0% vary. We are working hard to fill in gaps for our own clients
Yes Depends on No
the manager
18and this is a growing area of focus as a firm, as investor “Divesting may not be practical,” remarks Alex Lesch, partner,
focus on ESG is intensifying — and broadening — all the investment strategy and risk management, Adams Street.
time,” comments one European-based allocator. “We evaluate our managers’ exposure, approach and ESG
considerations given their specific ESG risks and concerns
LPs are certainly not becoming too overly prescriptive,
to ensure that ESG is integrated across the investment
yet, in assessing the ESG-reporting credentials of fund
lifecycle, as appropriate to their investments.
managers. There is an understanding that, while ESG is an
increasingly important aspect of understanding portfolio “There are various levels of reporting and we do not have a
risk, it is a journey that will take time to travel. Investors one-size-fits-all mindset. This helps inform our underwriting
are not expecting GPs to transform overnight but they of those managers to ensure we are considering all of the
want to see evidence that ESG risks are being taken pertinent risks when making investments.”
more seriously.
As a new report by Manulife reveals, 66 percent of LPs
see value creation as a leading driver of ESG. Having
an ESG policy is one way for GPs to demonstrate their
commitment but it is not a dealbreaker. When asked
“Where we would like to see more
whether they would divest from a manager who was not
improvement is on ESG data. The data
willing to show an updated ESG policy on an annual basis,
analytics and quality of data being reported
only one in 10 LPs were adamant that they would.
is increasing, and GPs are starting to try and
(See Figure 15.)
come up with some consistency of reporting
going forward. It’s a trend to watch and one
Figure 15: We would divest from a manager if they were not
we are pleased to see is happening.”
willing to show us their updated ESG policy, on an annual basis.
‑ Helen Lais, Capital Dynamics
40%
30%
20%
10%
0%
Very high High Neutral Low Very low
19Asset Allocation Trends
Comparing last year’s survey results to this year’s, the However, year-over-year, the level of interest for direct
level of interest among investors for co-investment investments has increased from 23 percent to 31 percent.
opportunities is unchanged, at 33 percent. (See Figure 16.)
Figure 16: Aside from commingled funds, what will be your preferred
investment method over the next 12 months?
35%
30%
25%
20%
15%
10%
5%
0%
Fund-of-funds Funds-of-one Segregated managed Direct investment Co-investment
accounts vehicles vehicles
This disintermediation trend is interesting to note. New York-based Grafine Partners recently wrote on Private
A growing number of LPs are starting to turn away Equity Wire one example of this is the formation of Capital
from allocating to the largest managers and towards Constellation, a joint venture founded in 2018 by the Alaska
experienced dealmakers who are starting their own Permanent Fund Corporation, the Public Institution for Social
shops — many of whom are spinouts from the giant firms. Security of Kuwait, RPMI Railpen and Wafra.
One of the key drivers behind this is the desire to be Grafine Partners is a platform that was formed to
directly involved with investments and partner with address the desire for the most sophisticated institutional
dealmakers outside of a traditional LP fund structure. As investors to invest directly into operating companies rather
Elizabeth Weymouth, founder and managing partner of than participating in a traditional blind pool fund. Direct
20investing is a key part of the Peugeot family’s strategy. in H1 2021 from USD 10.08 billion in H1 2020. While these
Peugeot Invest manages approximately EUR 6.5 billion, figures are encouraging, it would seem this year’s survey
of which 60 percent applies to direct investing. respondents have mixed views on the opportunity set. As
seen in Figure 17, nearly half of LPs (44 percent) said they
“We do one or two big deals a year, typically between
would not be increasing their exposure over the next 12
EUR 50 million and EUR 300 million to become long-term
months, while one in three LPs said that they would.
partners of company CEOs,” confirms Massut.
This desire for direct investing will doubtless keep GPs on Figure 17: Do you expect to increase your exposure to
PE secondaries over the next 12 months?
their toes over the coming 12 months. One consequence
of the increased competition to put dry powder to work 50%
is that valuation multiples will likely remain durable. To 40%
placate those LPs who are keen to avoid the typical blind
30%
pool fund commitment, managers will need to continue to
20%
provide co-investment opportunities.
10%
“When I joined six years ago we had one co-investment, 0%
Yes Undecided No
now we have 23,” states Massut.
“We do on average three to four co-investments a year Among that group, 42 percent confirmed that they would
with our GPs, with other family offices and with deal- look to increase their allocation to PE secondaries by five
by-deal platforms. We want exposure to sectors or to nine percent. (See Figure 18.)
geographies where we lack capacity or expertise, so most
of our co-investments are in the U.S. Our target is to have
Figure 18: If yes, by how much do you expect to increase
around 45 to 50 percent exposure to the U.S., 30 to 35 your allocation by, within your private equity portfolios?
percent to Europe and the rest to Asia Pacific.”
50%
Mixed sentiment on PE secondaries & buyout valuations
40%
After slumping 27.7 percent in 2020 due to the COVID-19 30%
crisis, the secondary market rebounded to a record 20%
USD 54.9 billion in the first half of 2021 according to 10%
the Setter Capital Volume Report 2021; a 171.7 percent 0%
increase from H1 2020. Private equity fund secondaries 20%
were up 100.2 percent, increasing to USD 20.18 billion
21One prominent U.K.-based LP says that current “Ten-year bonds are yielding less than 1.5 percent and
opportunities are weighted to GP-led deals, which historically this yield has been pretty closely correlated with
surged in the immediate aftermath of the pandemic the earnings yield of the S&P. The current earnings yield of
as timelines for exits were extended. the S&P is four to five percent so equities are much more
attractive than fixed-income securities.
“We do not see this segment of the market dropping to
pre-COVID levels any time soon, although we do expect “To know what will happen to valuations, one has to factor in
the market overall to balance, with a ramp-up of LP-led what will happen with interest rates. If rates rise materially,
opportunities in the second half of the year, now that equity valuations should fall which would pose a headwind
there is a clearer view on pricing. for PE returns. We are underwriting with the expectation of
higher rates and multiple compression. We are very cautious
“We focus on the mid-market and this is an area that is
on investments where leverage and rising multiples are
underserved relative to the large-cap space, which can
necessary to generate an acceptable underwriting return.”
support some attractive deal dynamics,” they say.
This mixed sentiment was also evident when LPs were
asked for their views on valuation multiples in the buyout
space. One in four investors are somewhat optimistic
on the buyout space for entry multiples, but one in three
investors are cautious.
“Price is important but it will also depend on the
This is understandable when one considers that deal underlying growth prospects. Also, does the GP
multiples in the U.S. and European buyout space are at, have the capacity to increase the operational
or close to, record levels. As Bain & Company’s report value? Managers might buy at 15x and in their
models they might expect to exit at the same
illustrates, the average EBITDA purchase price multiple for
multiple, or perhaps slightly lower. They can
leveraged buyouts in the U.S. last year was 11.4x, while in
only expect to increase the multiple arbitrage
Europe it climbed sharply to 12.6x.
with more EBITDA growth. We therefore look
Jeff Diehl is managing partner & head of investments for GPs with big operational teams.”
at Adams Street. He says that while equity valuations
‑ Francois Massut, Peugeot Invest
(both private and public) are full by historical standards
when calibrated against interest rates and investible
alternatives, they seem quite reasonable:
22Macro and Sector Outlook
Nearly 50 percent of LPs said they will be favoring North This is understandable given the strength of the U.S.
America, from a regional perspective, when making fresh market and the sheer depth of the talent pool.
capital commitments to GPs. (See Figure 19.)
“That said, our investors want to continue to invest in Europe
Figure 19: Which region will you be favoring and we continue to see good opportunities and strong
over the next 12 months when making capital performance in that part of the market.
allocations into alternatives?
“We are not overweighting our North American exposure or
50%
doing anything differently to previous years; we’re staying
40%
consistent with our expected asset allocation that we’ve
30%
agreed to with all of our investors,” explains Lais.
20%
10% At the sector level, Technology and Healthcare remain
0% the two most germane sectors that LPs want to see their
North U.K. and Asia Pacific Latin America managers continue to invest in. Collectively, they garnered
America Europe
55 percent of the survey vote, as one can see in Figure 20.
GPs with the expertise to get deals done in the biggest
alternative asset market retain significant appeal.
Figure 20: Which one of the following sectors do you most want to see managers invest in:
50%
40%
30%
20%
10%
0%
Technology Healthcare Infrastructure Energy Real Estate Consumer Goods Financial
and Power and Services
23This finding is slightly at odds with the survey’s earlier 2022. Nearly 70 percent of survey respondents either agreed
finding that one in three LPs expressed caution over or strongly agreed when asked to comment on this, which
market valuations in the buyout space: especially given should serve as a clarion call to GPs.
that Technology and Healthcare are key drivers of
At bfinance, Goodworth says that their investors are
buyout activity.
looking to get protection from, rather than profit from,
One sector that is out of vogue with LPs is Energy, which any future volatility.
only attracted 10 percent of the vote. “Some managers
“At the moment, clients are asking us to identify more
have included or increased their focus on technology and
market-independent managers; those who may not
healthcare, especially in the service sector. On our side,
profit from dislocations, but will equally not be impacted,”
we have a fairly well-balanced portfolio currently, although
he says. “Managers with low net exposure and a multi-
we have proactively reduced our exposure to the energy
asset component to their strategy, generating different
sector over recent years,” confirms Dupont.
uncorrelated return streams, are one example. Another
At Capital Dynamics, Lais explains that their approach is example would be systematic macro and systematic CTAs,
to include a variety of strategies across the middle which can avoid, rather than capitalize on, disturbances.”
market, noting that “being diversified gives us strong
Themes such as digitization and tech innovation (led by
downside protection.”
Financial Technology) are likely to feature prominently as
“We’ll have Healthcare, Technology, Consumer Retail, LPs allocate to alternatives over the coming 12 months,
Industrial and Manufacturing … a whole range of industries with some investors believing that COVID-19 has accelerated
in our investment products. We don’t tend to overweight many of the trends that were steadily gaining traction
or underweight any one particular sector. However, one pre-pandemic.
sector that we did decide to step back from a few years
“We agree with the majority of survey respondents on this,”
ago was Energy. That has proven to be a great decision,
says Optima’s Spindler. “To quote Microsoft’s CEO, Satya
given how much the Energy sector was negatively
Nadella, we’ve seen an explosion in e-commerce, in cloud
impacted by COVID-19 last year,” she says.
computing, and we think the train has left the station. These
A positive outlook on alternatives trends will continue to accelerate and it should lead to
opportunities for hedge fund managers to identify pockets
Looking ahead, LPs feel confident that the dislocations
of stress/weakness caused by these trends across different
caused by the pandemic should create further upside
industries and sectors.”
opportunities for alternative investments heading into
24Conclusion
Alternative fund managers can take confidence from the of LPs themselves not having a common set of expectations
fact that LPs have been broadly pleased with performance on what that level of transparency should be is unclear, but it
within private markets over the last 12 months. The is something GPs need to be aware of. Anecdotally, it would
pandemic has proven to be an important litmus test for seem that some investors have been very pleased with the
GPs to demonstrate their “edge” and this has been borne frequency of communication from their GPs during the
out by a strong set of annualized returns. So much so pandemic, but more needs to be done.
that nearly three-quarters of LPs plan on increasing their
allocation in 2022, with private equity leading the way as As the survey highlights, only 25 percent were “very satisfied”
the preferred asset class. with the technology capabilities of their GPs. Those who
continue to embrace technology to improve the GP/LP
The finding that the majority of LPs surveyed are also relationship could find that they gain a competitive edge.
choosing to increase the number of GP relationships
should also be viewed as a positive among fund managers, With ESG risks now becoming an integral part of risk
with emerging managers remaining a key aspect of how management, this is likely to be the next dominant theme in
investors will look to diversify their portfolios. Those how LPs assess the quality of reporting and transparency.
running niche strategies could fare well with non- The last 12 months have been a defining moment for
directional hedge funds that can protect investor capital alternative fund managers. As the investment opportunity
against dislocations, such as multi-strategy, which are set continues to evolve, those managers who embrace
figuring high on investment consultant lists. technology innovation to enhance the investor experience
should be well-positioned to showcase their skill and
This year’s survey reveals that LPs still want more demonstrate how they are delivering value in their clients’
transparency from managers. Whether this is a symptom portfolios. The next 12 months should be compelling.
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