08 Mar 2016
The explosion of separate managed accounts and co-investments is leading many investors to believe that larger funds are securing better deals with private equity firms than smaller investors, according to Coller Capital’s Global Private Equity Barometer Winter 2015/16. By focusing on their strengths, smaller investors may be able to punch above their weight in an industry which is evolving rapidly and is big enough for all.
The rise of separate accounts in private equity has been nothing short of meteoric. In Coller Capital’s latest Barometer, which surveys Limited Partners in the private equity industry, 35% of investors said their portfolios comprise separately managed capital, compared with just 13% three years earlier. Similarly, co-investment demand is booming. Last year's winter survey found that almost 80% of investors expect to have more than a tenth of their private equity portfolios in proprietary or co-investments by the end of the decade.
The developments are part of a drive by institutions to increase control over their investments following the financial crisis, and a desire to reduce fees and improve returns. While co-investments are not the preserve of the largest, these investors can write bigger cheques, and have more professionals to analyse such opportunities.
These developments are creating concerns that not all investors are equal. In Coller’s Winter Barometer, 71% of investors believed smaller investors are disadvantaged by the amount of capital that larger peers are committing to individual private equity groups. And two-thirds of respondents who perceive there is a size advantage, also believe that there will be a divergence in returns from private equity between the two groups.
However, it is worth remembering that large investors face their own challenges. Sometimes, due to their size, they cannot always get enough capital into their chosen funds or investments. Last summer's Barometer reported that 42% of investors had to settle for smaller-than-desired allocations with private equity managers on numerous occasions.
By contrast, smaller investors can more easily navigate the mid- and lower mid-market segments, which larger peers can struggle to reach because of their large minimum investment sizes. These segments contain some of the best-performing investment managers in the private equity universe. Here a €10m commitment to a €100m fund can carry the same weight as a large investor’s €100m commitment to a €1bn fund.
Investors can also help themselves by understanding private equity managers’ needs. Being able to make quick decisions about potential co-investments – whether yes or no – is often as valuable as being able to write large cheques.
It would be a mistake to assume the traditional private equity model will die out. According to the Barometer, the vast majority of investors expect funds to remain a very important means of investing. Yet, the industry is evolving rapidly and investors and managers need to adapt to the changes. With openness and transparency, private equity managers are able to treat all investors fairly. Meanwhile, investors can make the most of private equity relationships by playing to their strengths regardless of their size.
Sebastien Burdel, Partner, Coller Capital
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