Over the past 20 years or so, the private equity industry has witnessed a wealth of changes across a variety of areas as fund managers have adopted new and innovative private equity strategies in order to deliver improved returns to their underlying investors against a backdrop of evolving regulation. Traditional approaches to accessing private equity has seen fund managers and their investors turn their attention to alternative strategies such as secondaries, distressed private equity and mezzanine to name but a few.
A report published by Preqin in 2012 Q3 indicated that buyout and venture capital vehicles made up the majority of the marketplace during 2000, which equated to 65% market share. This figure for providing fund vehicles dropped considerably during the 10 years that followed to a mere 37% in 2010 as alternative approaches appeared more attractive to fund managers across the industry.
In order for fund managers and investors to tap in to higher returns and gain access to private equity, we have seen many LPs look at the secondary market in recent years as a method to gain exposure to the asset class. The benefits of this include the ability to gain access to the secondary market, usually at discounted rates, while at the same time helping fund managers to diversify their portfolio in order to mitigate risk and gain access to various funds during vintage years.
Furthermore, during this year in the US we have seen institutional investors allocating capital to separate accounts in order to increase their exposure to a variety of market segments and geographies, while also seeking to develop more flexible relationships with their respective fund managers. It has been well documented that both the California Public Employees’ Retirement System, the Teacher Retirement System of Texas and certain Trust Retirement Funds have been looking at separate accounts during 2012. Despite this approach currently representing a relatively small amount of the total market place at present, time will tell whether this approach will evolve and be adopted by UK and European based fund managers.
In recent years we have seen investors adopt a more proactive approach with regards to investment in private equity, as many of them are looking to pursue the most appropriate strategies to maximise their investments. Now, this objective can be achieved through a variety of options including direct exposure, separate accounts and via the secondary market, to name but a few. As a result, it is important that fund managers gain a clear understanding of investor preferences, wants and needs in order to delivery against their objectives.