Private Equity Investors Bullish on the Market’s Future

Nearly eight in ten LPs (79%) say their private equity allocations will hold steady or rise in the years ahead, but average commitment sizes have declined. The research found Asian LPs, many of them newer to the asset class, are enthusiastic about upcoming PE opportunities but concerned by tax challenges and often constrained by cautious board overseers.    

In addition, most private equity firms, or general partners (GPs), are optimistic about their future. Asian GPs were the most bullish about the future of the private equity industry with a score of 4.29 (5 being most bullish and 1 being least bullish), followed by North America (3.83), and Europe (3.62). Many North American and European GPs suggest they will head to Asia for the first time to raise funds.

The research paper, “Private Equity Faces the Future: Candid Views from the Market,” suggests that while private equity clearly remains an attractive asset class, both PE investors and firms are focused on negotiating ways to address the demands for more clarity on returns, more information about investments, and lower fees.

“While LPs want more private equity, they also want ‘better’ private equity, which means aligning their interests with GPs, as well as improved transparency and reporting,” said Brian Ruane, chief executive officer of BNY Mellon’s Alternative Investment Services group, in a press release.  

LPs and GPs alike expect that management fees and transaction fees will be of highest priority in upcoming partnership term negotiations. In addition, GPs are receiving more extensive requests for information about portfolio companies and the firms themselves.  Most expect a fundamental change in the detail and frequency of investor reporting.

Among many regulatory and tax proposals, GPs globally are very concerned about the potentially expensive and restrictive requirements of the proposed European Union Alternative Investment Fund Manager (AIFM) directive. GPs at small- and medium-sized private equity firms tend to expect a greater and potentially more burdensome impact from proposed tax and regulatory changes than do GPs at the largest firms.

The BNY Mellon/PEI white paper was based on 102 detailed interviews conducted between December 2009 and March 2010 with GPs, LPs, and other industry stakeholders.  

The full report can be accessed at http://www.bnymellon.com/alternativeinvestmentservices.