(September 10, 2013) – Private equity firms should look to make key strategic adjustments to survive the sector's current stagnation, according to a recent survey by SEI.
Although the overall outlook for the market remained positive, structural challenges and the oversupplied industry have stalled fund managers from raising enough capital to jump start the sector from the financial crisis, the study found.
A total of 654 organizations participated in SEI’s survey over the last four years—75% investment management firms, 16% institutional investors, and 11% consultants.
The report worked from the premise that the recovery of the PE business is hindered by scarce investment opportunities and structural challenges including pervasive economic uncertainty.
The result? Fund managers who have been stuck with “zombie” funds, heavier regulations, and higher taxes.
Plus, the survey concluded that limited partners are becoming more aggressive and consultants more demanding.
For general partners (GPs) wishing to successfully stay in the game, SEI recommended the following: Search for untouched sources of capital; cash in on the secondary market for potential exits; be amenable to reducing management fees; leverage technology and operational partnerships to satisfy investors and improve efficiency, and; take initiative to meet new regulatory demands.
The study showed that more than 4,500 firms were competing for limited PE business, contributing to slower and fewer acquisitions, which, along with insufficient IPOs, blocked exit options from standing investments.
To escape this rut, SEI said GPs must tap into overlooked sources of capital, including family offices, foundations, and endowments.
Smaller investors were the most likely of those surveyed to predict increases their PE allocation. Just over one-third (36%) of all asset owner respondents said they planned to do so.
SEI found that 69.8% of limited partners found lower management fees the most appealing factor in committing to a certain PE fund. Furthermore, by offering greater transparency and improving investment team quality, the report suggested that GPs could improve their chances of securing valuable assets.
As managers have looked for ways to both satisfy investors and increase efficiency in the current lackluster fundraising situation, they should seek to leverage technology and operational partnerships—a strategy that could benefit LPs while aiding a GP’s outcome, SEI said.
And lastly, the report recommended that competitive GPs can better weather regulation by streamlining compliance processes, such as filing for the annual Form PF. This, in turn, could promote increased outsourcing.
The full paper can be found here.
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