Those that can turn a professionalized back office to their advantage may just find the way to pull ahead of the competition.
LPs setting the terms and backing the best
LPs have always been the most important stakeholder. As investors in their funds, firms have always needed to ensure open communications with them. However, over the last few years, LP demands have increased dramatically.
The crisis prompted LPs to request much more detailed reporting from PE funds, including granular information on individual portfolio companies, as they sought to better understand the status of their underlying investments.
While the effects of the crisis have faded and many investors have become less capital-constrained, LPs continue to demand more information from their GPs than previously, particularly when PE firms are fund-raising. 'Transparency' has replaced 'compliance' as the new paradigm.
LP's appetite shifts towards emerging markets
LPs have become more sophisticated in their approach to managing their PE investments, and they are showing signs of becoming more selective about the funds they invest in. They are focusing their attention on top quartile performers with proven track records. Last year, fundraising fell to pre-2005 levels, as 337 funds attracted a total of US$194b, according to Preqin figures.
And while the majority of the top 10 funds raised in 2010 were targeted at developed markets, two Latin American funds are featured in the list, attesting to a shift in LP appetites toward emerging markets. Indeed, a recent study suggested that the median proportion of LP commitments targeted at emerging markets will rise from 6%-10% today to 11%-15% within just two years.
Top 10 emerging market buyout funds raised 2010
Final close size (US$m)
|Carlyle Asia Partners III ||2,550 ||Emerging Asia |
|Southern Cross Latin America Fund IV ||1,680 ||Latin America |
|Advent Latin American Fund V ||1,650 ||Latin America |
|CHAMP Buyout III ||1,463 ||Emerging Asia |
|CDH China Fund IV ||1,458 ||China |
|Navis Asia Fund VI ||1,200 ||Emerging Asia |
|GP Capital Partners V ||1,100 ||Latin America |
|CITIC Capital China Partners II ||925 ||China |
|Quintana Energy Partners II ||350 ||China |
|Northstar Equity Partners II ||285 ||Indonesia |
|Source: Preqin |
For more EY data in relation to emerging markets, please click here.
Competition for LP capital likely to be fierce
Globally, there are currently 1,100 funds in the market, seeking a total of US$500b. Although we expect fund-raising figures to rise for 2011, competition for LP capital will be fierce. Only those that are able to meet — or exceed — LP requirements in terms of investment strategy, track record, transparency and reporting will be successful in meeting expectations.
Key to negotiations will be the interplay of the guidelines issued by the Institutional Limited Partners Association (ILPA). ILPA's first series of recommendations, which were set out in 2009, have already formed the backdrop of many discussions between LPs and GPs, particularly during fund-raising. Indeed, over the last 18 months, there has been a shift in fund terms in LPs' favor, with the level and treatment of management fees and transaction fees impacted the most.
ILPA has since issued a second round of guidelines (ILPA 2.0) providing more direction around their three guiding principles — alignment of interests, governance and transparency. In addition, they added new recommendations in areas such as claw backs and are providing standardized reporting templates.
These remain a work in progress as ILPA has indicated they will look to add more templates in the future as the organization seeks to address LP concerns around accuracy of PE fund reporting and resources required to administer PE fund portfolios.
The organization did state in its revised introduction, "The detail should always be seen as subordinate to the more general principles,"* reminding the GPs that the specific template used is less important than the progress in meeting the guidelines themselves. There are also similar moves on a regional level as the European Private Equity and Venture Capital Association has recently announced plans to update its professional standards guidance.
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