1. 2011 SEI Private Equity Survey
TURNING CLIENT
KNOWLEDGE INTO A
COMPETITIVE ADVANTAGE
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PART THREE OF THREE
2. The Survey
A total of 411 institutional investors, consultants, and fund
managers took part in SEI’s 2011 Private Equity Survey.
Just under half of the survey participants are based in the
United States. Another 30% are domiciled in Europe while
Asia, Latin America, Australia, and Africa represent the
remaining 21% of the survey universe.
Investors and consultants participating in the survey
report a wide range of experience with private equity.
More than half have been in the asset class for ten or
more years. The remaining 47% are evenly split between
those with seven to ten years experience and those with
six or fewer years as private equity investors.
Survey results are being presented in a three-part
series of papers:
I: THE LOGIC OF FUND FLOWS analyzes where, why
and how institutions invest, asset allocation trends among
investors, and how private equity fund managers are
evaluated and selected.
II: SEARCHING FOR ALIGNMENT explores a variety
of challenges facing investors and fund managers,
contrasting perspectives on transparency, and the
operational investments and budget priorities among
fund managers.
III: TURNING CLIENT KNOWLEDGE INTO A
COMPETITIVE ADVANTAGE examines obstacles facing
fund managers, changes they are making to better
serve clients and attract capital, key challenges faced
by managers in satisfying investors, and factors keeping
investors from raising allocations to private equity.
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3. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
A KIND OF ALCHEMY The private equity market is finally
exhibiting some vital signs, several years after activity came
to a virtual standstill when cheap credit evaporated amid
the global financial crisis. Despite a considerably improved
and optimistic environment, challenges remain. Institutional
investors, consultants, and fund managers all maintain
unique and sometimes divergent perspectives. Investor
expectations and manager priorities are not always aligned.
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4. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
What exactly do investors and consultants need? Obstacles facing fund managers
Are there challenges facing managers that can be
and changes they are making to
converted into opportunities? What happens next?
retain clients and attract capital
In an attempt to familiarize industry participants with
each others’ perspectives and provide actionable Key challenges faced by managers
intelligence to those looking to position themselves in satisfying existing investors
more competitively, SEI conducted a survey of
411 private equity fund managers, investors, and Factors keeping investors from
consultants. Results are being released as a three-
raising allocations to private equity
part series. As part three of the series, Turning
Client Knowledge into a Competitive Advantage is
focused on:
Meeting the Needs of Clients and Prospects
A lack of liquidity and underwhelming performance Fees are also lower in some cases. Almost 22% of
means most fund managers have had to placate investors say they have paid lower management fees
their often dissatisfied investors in other ways over over the past two years, while more than 38% report
the past few years. Almost 70% of investors say they paying lower incentive fees. When fund managers
have enjoyed greater transparency from their private were asked the same question, 37% report lowering
equity fund managers, while 59% of managers say management fees during the same time period,
they have provided it [Figures 1 and 2]. while 11% say they lowered performance fees.
Just over a fifth of all investors and consultants say Scale is being rewarded: 80% of investors with $10
their private equity investments have become more billion or more of assets saw their management fees
liquid since 2008. A similar percentage of fund lowered since 2008, compared to 33% of investors
managers report taking steps to make their vehicles with less than $10 billion of assets. Similarly, large
more liquid in order to retain or attract new capital. fund managers were the most likely to have lowered
management fees during that time.
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5. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
Since the market decline in 2008, has the following increased, decreased or stayed the same?
Figure 1. Since the market decline in 2008, has the following increased, decreased or stayed the same?
Increased Decreased Stayed the Same
Level of transparency
Frequency of liquidity
Maximum lock-up period
Withdrawal notice period
Management fee
Incentive fee
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percentage of Investors and Consultants
Source: 2011 SEI Private Equity Survey
Figure 2. Since the market decline in 2008, what changes have you made in order to retain/attract new capital?
Increased transparency
Lowered management fee
Increased liquidity
Reduced lock-up periods
Lowered incentive fees
Reduced notice period
0 5 10 15 20 25 30 35 40 45 50 55 60
Percentage of Managers
Source: 2011 SEI Private Equity Survey
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6. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
Private equity fund managers cite a variety of necessarily superior to smaller ones, and persuading
challenges in satisfying their existing clients. Outside investors that professional management of private
of investment performance, getting investors equity investments has value and is worth the cost.
comfortable with their infrastructure was named
the single biggest challenge [Figure 3]. Smaller Given these challenges, it is surprising that only half
managers in particular were likely to say this was of all private equity fund managers are investing in
an ongoing issue for them. Providing satisfactory their reporting capabilities and/or their client service
attribution data and effectively educating clients function [Figures 4 and 5]. Smaller fund managers
also pose challenges to many managers. It should are especially reticent to make investments in their
be noted that many managers, including more than reporting capabilities. With more resources available
a third of those with $5 billion or more in assets, to them, large managers are not only more likely
chose “other” when asked to name their greatest to invest in reporting, but are also more likely than
challenge in satisfying clients. Examples of these smaller firms to be making investments in client
include convincing investors that a portfolio is service. Regulatory requirements are ultimately likely
making progress despite relatively few exits, trying to prove a strong catalyst for managers of all sizes
to convince investors that large funds are not to further invest in their client reporting capabilities.
Figure 3. Other than delivering expected performance, what is the greatest challenge in satisfying investors?
Getting investors comfortable with infrastructure
Providing satisfactory performance attribution data
Providing broader education/consulting
Providing satisfactory risk analytics
Other
0 5 10 15 20 25 30
Percentage of Managers
Original text below in cases where wording was shortened for charting purposes:
-Getting investors comfortable with firm's operating infrastructure Source: 2011 SEI Private Equity Survey
-Providing investors with education/consulting above and beyond my firm's specific activities
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7. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
Figure 4. Have you made any material investments (personnel or technology) in client reporting in the past
18 months or do you plan on making any in the next 18 months?
Percentage of Managers
Yes: 50.6%
No: 49.4%
Source: 2011 SEI Private Equity Survey
Figure 5. Have you made any material investments (personnel or technology) in client service in the past
18 months or do you plan on making any in the next 18 months?
Percentage of Managers
Yes: 48.5%
No: 51.5%
Source: 2011 SEI Private Equity Survey
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8. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
FUND MANAGERS
PLANNING TO RAISE
FUNDS IN THIS CLIMATE
WILL WANT TO LISTEN
CLOSELY TO WHAT
INVESTORS HAVE TO SAY
Roadblocks or Renegotiations?
Given large overhangs of uninvested capital, raising [Figures 6 and 7]. Instead, investors quote an array
money is not an immediate priority for many fund of factors that might prevent them from allocating
managers. Nevertheless, the pace of fundraising any additional funds to private equity at the present
is ticking up slightly, with almost two thirds of all time, including liquidity concerns, overall risk,
current LPs making new commitments in the first performance issues, and high fees. All of these
half of 2011, and 57% intending to make additional concerns are echoed in responses to a question on
commitments by the end of the year.1 Funds based the criteria employed by investors when evaluating
in the U.S. raised $64.7 billion during the first half and selecting fund managers [See Part I: The Logic
of 2011, up from $47.8 billion raised during the first of Fund Flows].
half of 2010. European private equity funds brought
in $24 billion during the first six months of the Corporate investors are most likely to cite liquidity
year, up from $16.2 billion twelve months earlier. 2
terms, poor performance, and high fees as barriers
Worldwide, almost $128 billion was raised during the to further private equity investments. Foundations
first half of 2011. 3
and endowments are the most likely to be content
with their (already relatively high) allocations, but
Fund managers planning to raise funds in this they also have some concerns over risk. Funds of
climate will want to listen closely to what investors funds (FOFs) cite liquidity terms, poor performance,
have to say. Generalized fear and anxiety are and high fees. Public plans most often cite risk
currently perceived by managers to pose the concerns, followed by liquidity terms.
biggest obstacles to raising capital, but this is not
borne out by the responses provided by investors
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9. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
Figure 6. Managers, what is the biggest obstacle to raising capital?
Content with curren
Liquid
Investor fear/reluctance Ri
Performance
P
Liquidity concerns
Hi
Risk concerns
Lack of tr
Lack of fund infrastructure
Extended du
High fees/cost
Investment committee discomfort Investment committee
Extended due diligence Investor fea
Lack of transparency Lack of fund in
0 5 10 15 20 25 30 35 40 45 50
Percentage of Managers
Source: 2011 SEI Private Equity Survey
Figure 7. Investors/Consultants, what are the three biggest obstacles to allocating a greater proportion of assets
to private equity?
Liquidity terms
Risk concerns
Poor performance
High fees/cost
Lack of transparency
Extended due diligence
Discomfort on part of investment committee
Fear/reluctance
Lack of fund infrastructure
0 5 10 15 20 25 30 35 40 45
Percentage of Investors and Consultants
Note: Multiple choices allowed Source: 2011 SEI Private Equity Survey
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10. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
Many fund managers have already taken concrete Public pension plans, FOFs, and corporate investors
steps aimed at attracting larger institutional are the most likely to identify graduated fees as
mandates. More than 60% have increased the most attractive trade-off for a larger allocation.
transparency in their reporting, while almost half Foundations and endowments favor transparency.
have introduced graduated fees based on the Family offices are split between graduated fees and
amount of capital committed [Figure 8]. Those shorter lock-up periods.
reducing the length of their lock-up periods
comprise a much smaller group, even though it
is something that 28% of investors identify as the
factor most likely to appeal to them as they consider
increasing the size of their allocation.
MANY FUND MANAGERS
HAVE ALREADY TAKEN
CONCRETE STEPS AIMED
AT ATTRACTING LARGER
INSTITUTIONAL MANDATES
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11. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
Figure 8. Managers, which of the following have you offered to attract larger institutional mandates? Investors,
which do you consider most appealing in return for a larger commitment of funds to a private equity manager?
Investors Managers
Increased reporting transparency
Graduated fees based on the size of the mandate
Reduced lock-up periods
0 5 10 15 20 25 30 35 40 45 50 55 60 65
Percentage of Participants
Note: Multiple choices allowed for managers Source: 2011 SEI Private Equity Survey
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12. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
What Next?
Having been revived from its crisis-induced coma, Despite this increasingly favorable environment,
the private equity sector is recovering gradually. many investors continue to be wary and are
Funds are circulating more freely and the number operating with significantly higher expectations after
of investments and exits is rising in tandem. having suffered a profound shock to the system
Fundraising activity, especially when a large overhang during the financial crisis. Nagging concerns over
of uninvested capital remains, is testament to the performance, liquidity, and fees will inevitably fade
growing enthusiasm of fund managers and investors as optimism grows, but it would be a mistake for
alike. Faced with less attractive prospects in many fund managers to think that they can rest on their
other asset classes, institutional investors are once laurels. With deep concerns ranging from portfolio
again raising their allocations to private equity. liquidity to risk transparency, meeting the needs of
institutional investors has become more critical than
ever before.
INSTITUTIONAL INVESTORS
ARE ONCE AGAIN RAISING
THEIR ALLOCATIONS TO
PRIVATE EQUITY…
BUT MEETING THE NEEDS
OF INSTITUTIONAL
INVESTORS HAS
BECOME MORE CRITICAL
THAN EVER BEFORE.
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13. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
With so many funds from which to choose, investors can afford to be more discerning than ever. In order to
attract a portion of the increasingly free flowing capital, fund managers will want to:
1. Be aware of evolving selection criteria. As seen 3. Turn client service into asset growth. Fund
in Part I: The Logic of Fund Flows, this means managers have adapted in a variety of ways over
offering a clearly articulated investment philosophy the past few years. Many of these changes have
and process while remaining flexible on terms and come about in response to pressure applied by large
conditions. Due diligence is more rigorous than ever, investors. Despite this, many managers continue to
and managers should be prepared to demonstrate operate without all of the facts. As seen in this paper,
things like their sector expertise, high-quality client Part III: Turning Client Knowledge into a Competitive
reporting, deep performance attribution analytics, Advantage, half of all managers surveyed point
and effective risk management infrastructure. to investor fear as the biggest obstacle to raising
capital. The truth is that investors and consultants
2. Bridge the transparency gap. Industry have a number of very specific concerns, with
participants all agree that there is more transparency fear falling near the bottom of the list. Most of
than ever before. Nevertheless as seen in Part these concerns can be addressed by any manager
II: Searching for Alignment, a considerable gap choosing to adopt a proactive approach. Investor
remains between investor expectations and relations can, and should, be used as a source of
manager perceptions. There is an opportunity for actionable intelligence and will likely require greater
managers to establish a competitive advantage by investment by fund managers going forward.
offering enhanced transparency in areas such as
counterparty risk, leverage and volatility. It is our hope that this series of papers, in addition to
illuminating some actionable areas of improvement
for private equity managers, will lead to improved
communication between managers, institutional
investors, and consultants as private equity regains
its footing and re-establishes itself as a healthy and
vibrant part of the global economy.
1 The Preqin Quarterly, Q2 2011
2 Dow Jones LP Source
3 Preqin 11
14. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
About SEI
SEI (NASDAQ:SEIC) is a leading global provider and regulatory insights to each client’s business
of investment processing, fund processing, and objectives. SEI’s resources enable clients to meet
investment management business outsourcing the demands of the marketplace and sharpen
solutions that help corporations, financial business strategies by focusing on their core
institutions, financial advisors, and ultra-high- competencies. The division has been recently
net-worth families create and manage wealth. recognized by HFMWeek as “Most Innovative
As of June 30, 2011, through its subsidiaries Fund Administrator (Over $30bn AUA)” and “Best
and partnerships in which the company has a Funds of Hedge Funds Administrator (Over $30bn
significant interest, SEI manages or administers AUA)” in both the US and Europe. Additionally,
$430 billion in mutual fund and pooled assets or SEI has been recognized as “Service Provider of
separately managed assets, including $180 billion the Year” by the Money Management Institute,
in assets under management and $250 billion among other industry awards.
in client assets under administration. For more
information, visit www.seic.com. The SEI Knowledge Partnership is an ongoing
source of action-oriented business intelligence
SEI’s Investment Manager Services division and guidance for SEI’s investment manager
provides comprehensive operational outsourcing clients. It helps clients understand the issues
solutions to support investment managers globally that will shape future business conditions, keep
across a range of registered and unregistered abreast of changing best practices, and develop
fund structures, diverse investment strategies and more competitive business strategies. The
jurisdictions. With expertise covering traditional Partnership is an initiative of SEI’s Investment
and alternative investment vehicles, the division Manager Services division.
applies customized operating services, industry-
leading technologies, and practical business
About Greenwich Associates
Greenwich Associates provides research-based Connecticut, with additional offices in London,
strategy management services for financial Toronto, Tokyo, and Singapore, the firm offers over
professionals. Greenwich Associates’ studies 100 research-based consulting programs to more
provide benefits to the buyers and sellers of than 250 global financial services companies. For
financial services in the form of benchmark more information on Greenwich Associates, please
information on best practices and market visit www.greenwich.com.
intelligence on overall trends. Based in Stamford,
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15. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage
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