The latest figures from Preqin, a data provider, indicate that this year PE funds have been closing with fewer limited partners, but they are placing larger investments into each fund. That is the case globally and for Luxembourg-based PE outfits, according to Renaud Oury, chief revenue and data officer at Apex Group, a fund and corporate services provider. Two factors, “that might be seen as a bit contradictory,” are behind this trend, says Oury.
In terms of the “larger ticket size” observed in the market, he confirms that “we see larger [limited partners] investing larger amounts into funds.” This is due to “the fact that the sophistication of investors has increased”, resulting in “a number of elements”. Firstly, “investors are requesting more transparency from the funds. They are requesting access to real-time data reports and also to real-time ESG metrics.”
With “the LPs becoming bigger, they’re starting to have an impact on the type of information that they can receive from the funds. All this normally is arranged in side letters, where effectively the investor being bigger, they can request more extensive or additional reporting, accelerated reporting timelines, or even sometimes better economic conditions, such as lower management fees, for instance, or more favourable carried interest. So really, we see the larger investors being effectively able to ‘partner’ with the [general partners],” Oury observes. “We see it in Luxembourg, but a bit everywhere” too.
“The second element that we have seen, and that, I think, is really interesting from an investor point of view, is that alternative investments, and specifically private equity, have started being extremely attractive for retail investors. Retail investors want to have access to PE investments,” he reckons. Retail demand is “definitely driven by the surge of growth--there’s a lot of growth that can be generated--in the PE environment. And during the pandemic, you may have seen that the savings of retail investors have increased, so there’s more money to invest. And so they want to be able to have access to PE funds. And I think there’s also a perhaps psychological element, meaning that during the pandemic, a lot of consumers have started really looking at how their money was spent when they were going to buy something, and in PE you are much closer to the investment than in traditional funds.”
Retail investors, of course, typically cannot place their savings directly into a PE fund, but a number of forums are opening up for them, Oury explains. “Retail investors are not able to do it because the ticket size is too large and so to be able to have access to [PE funds], we have seen a number of specific platforms and specific vehicles that have emerged to capture these demands. Some feeder funds have been created to pull subscriptions from retail investors. So, collectively, they become a feeder investor into a fund requiring larger commitments.” He cites the example of Icapital, which “is really a great platform for this purpose.”
GP-LP links more focused
In sort of a chicken-and-egg question, Delano wondered if LPs were simply making bigger investments and so they’re able to tack on bigger data demands, or do they need more data which require bigger placements to get. “Currently, it’s really the relationship between the GP and the LP that is evolving. Now GPs and LPs are really seeing each other more as partners. And the LPs are eager to make more investments. But for that they require more transparency, and more types of reports. So it’s really because they are bigger, effectively, they have more say in the type of information that they want to get from the fund.”
Oury continues: “One of the general trends that we have really seen globally is that allocators are allocating more to the names that they know, and to the names that they trust. And so they are narrowing the number of GPs they are working with, and so they are enlarging the tickets.” This consolidation is driven by several factors: “Definitively in terms of return, in terms of, once again, the type of reporting that they can get out of [a fund], when they have built a relationship of trust with a GP, they want to be able to leverage that. I think it’s quite interesting to see that the requests for additional transparency are coming even more often when the LPs are already investors in one of the GP’s earlier vintages. So when they start having a long-term relationship with the GP, they start asking for additional information, additional transparency, and it will also incentivise them to continue to work and to continue to invest with the funds.”
These shifts are not impacting fund service providers in the same way as fund firms, Oury states. “No, we are not working with fewer firms. We have more and more clients. Last year, more than 700 new clients started working with us. This trend is continuing in 2021.” To handle these new data and reporting requirements, firms like Apex are undertaking a “massive IT investment to be able to provide this information to our clients, so that they can cascade this information to their investors.”
“What we have decided, as a strategic decision, already for a number of years now, is that we are running an open IT architecture. What does it mean? It means that we are running different types of IT platforms to be able to service our clients. Without being too technical, we are using Efront, but we are also using Investfront. And for the real estate funds, we are using Yardi. So it means that we have the different platforms that allow us to integrate real-time with the platforms of our clients. Being able to have this technology that can directly flow from Apex, or from any service provider, to the data platforms of our clients is something that is very important. This is one of the reasons why we are effectively running different systems in parallel, so that we can effectively adapt our systems and connect our systems to the end systems of our clients.”
More transparency to come
Looking ahead, “I definitely think on the transparency side and on the requirement of additional reports and more real time data, on ESG reports, it will increase, it will really increase. I think that we are just at the beginning of the ESG focus from investors. It’s something that is really important. We see more and more requests coming from investors and also coming from the regulator. So definitely, yes, this transparency will increase in terms of concentration of LPs.” While Oury could not provide a specific growth forecast, he is convinced that heightened data demands “will continue to increase”.
Fuelling this further flow of figures is increased investor interest in ESG criteria, and to a much less extent the EU’s new SFDR regulations. “This is really requested by the end client. So it’s not driven by SFDR but [that is still] one of the elements that is important here.”
It’s becoming a basic data point to evaluate the carbon footprint of underlying investments. “We see really the end investor wants to know where they are investing, wants to make sure that they even make an impact. So we see an emerging trend in terms of impact investments. And what is interesting with impact investment is that a few years ago, investors that were investing in an impact investment had to choose either to make an impact or to get a return. Today they can have both. They can know that they will make an impact, they will effectively help change something, they will be able to invest in line with what they believe is good, and they will have a return that might even be higher than the return of a non-ESG fund.”