LP SENTIMENT CHAPTER “INVESTORS MUST APPROACH VENTURE CAPITAL WITH CAUTION, PARTICULARLY THOSE NEW TO THE ASSET CLASS AND LACKING EXISTING RELATIONSHIPS”
ANNA MORRISON
SENIOR DIRECTOR, PRIVATE MARKETS, BFINANCE INTERNATIONAL
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trong secular trends will support growth in impact private equity in 2022 and beyond, with increased accountability at the corporate level for net zero commitments and PRI signatory status, for example, coupled with ongoing and increasing regulatory requirements. There is more clarity that impact investment is no longer a concessionary asset class, which clears one hurdle. LPs are now moving onto different considerations, such as where impact strategies fit within portfolio construction. We are also seeing a number of traditional fund-of-funds groups raising funds dedicated to impact investing, alongside a group of specialised providers. This speaks to the growing maturity of this segment. Among specialist managers, we are increasingly focused on the impact sector as a growing area of interest for clients. The expanding, broad range of investment options and providers position this sector as a sensible addition to a diversified private equity portfolio.
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We are also witnessing increased investor appetite for venture capital given the strong performance of this asset class over recent years and particularly during the pandemic. This space must be approached with caution, particularly for those investors who are new to the asset class and lack existing relationships. This area of the market is best addressed initially with the help of specialist fund of fund providers, so we expect to see continued demand in this space. We also envisage continuing high demand for secondary strategies, both from investors with established private equity programmes and those new to the asset class. Newer entrants to private equity find this space particularly appealing, due to the reduced j-curve, the faster path to a highly diversified portfolio (vintage, geography, strategy) and the earlier distribution profile. The maturity of the secondaries sector has also helped to address some of the traditional pain points felt by LPs in standard fund of fund models. We’ve seen a shift in global fund-of-fund allocations, with managers moving away from primaries (although this generally remains the largest
overall allocation) and towards larger allocations to co-investment and secondaries. As well as allowing fund-of-funds to provide investors with a more ‘secondaries-like’ cash flow profile, these give managers more opportunity to gather performance fees, since the market is moving away from charging performance fees on primaries. Over time, we see knowledge transfer forming an important part of the offering from fund-of-funds, and expect this to continue into 2022. Knowledge transfer capabilities have come a very long way in the past decade, and demand from our clients continues to increase, particularly for first-time investors who wish to build out programmes, and investors seeking to insource management gradually over time. Many fund-of-fund managers have now acknowledged that knowledge transfer needs to be part of their servicing in order to remain competitive and that this should be highly tailored – even for smaller investors. This can range from tailored education services right through to providing GP introductions and direct access to funds outside of the existing fund of fund relationship.
PRIVATE EQUITY GLOBAL OUTLOOK REPORT I JANUARY 2022
