2011 SEI Private Equity Survey       TURNING CLIENT    KNOWLEDGE INTO ACOMPETITIVE ADVANTAGE                           3  ...
The Survey    A total of 411 institutional investors, consultants, and fund    managers took part in SEI’s 2011 Private Eq...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageA KIND OF ALCHEMY...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage                 ...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageSince the market ...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage                 ...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageFigure 4. Have yo...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage                 ...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageFigure 6. Manager...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage                 ...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageFigure 8. Manager...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage                 ...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageWith so many fund...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage                 ...
2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage                 ...
1 Freedom Valley Drive Oaks, PA 19456 610 676 1270                                                       www.seic.com/ims ...
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SEI Report on Funds

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SEI Report on Funds

  1. 1. 2011 SEI Private Equity Survey TURNING CLIENT KNOWLEDGE INTO ACOMPETITIVE ADVANTAGE 3 PART THREE OF THREE
  2. 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.2
  3. 3. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageA KIND OF ALCHEMY The private equity market is finallyexhibiting some vital signs, several years after activity cameto a virtual standstill when cheap credit evaporated amidthe global financial crisis. Despite a considerably improvedand optimistic environment, challenges remain. Institutionalinvestors, consultants, and fund managers all maintainunique and sometimes divergent perspectives. Investorexpectations and manager priorities are not always aligned. 1
  4. 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. 2
  5. 5. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageSince 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 3
  6. 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 firms operating infrastructure Source: 2011 SEI Private Equity Survey -Providing investors with education/consulting above and beyond my firms specific activities 4
  7. 7. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageFigure 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 SurveyFigure 5. Have you made any material investments (personnel or technology) in client service in the past18 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 5
  8. 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 6
  9. 9. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageFigure 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 SurveyFigure 7. Investors/Consultants, what are the three biggest obstacles to allocating a greater proportion of assetsto private equity? Liquidity terms Risk concerns Poor performance High fees/cost Lack of transparency Extended due diligenceDiscomfort 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 7
  10. 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 8
  11. 11. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageFigure 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 9
  12. 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.10
  13. 13. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive AdvantageWith so many funds from which to choose, investors can afford to be more discerning than ever. In order toattract 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. Fundin Part I: The Logic of Fund Flows, this means managers have adapted in a variety of ways overoffering a clearly articulated investment philosophy the past few years. Many of these changes haveand process while remaining flexible on terms and come about in response to pressure applied by largeconditions. Due diligence is more rigorous than ever, investors. Despite this, many managers continue toand 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 Competitivereporting, deep performance attribution analytics, Advantage, half of all managers surveyed pointand effective risk management infrastructure. to investor fear as the biggest obstacle to raising capital. The truth is that investors and consultants2. Bridge the transparency gap. Industry have a number of very specific concerns, withparticipants all agree that there is more transparency fear falling near the bottom of the list. Most ofthan ever before. Nevertheless as seen in Part these concerns can be addressed by any managerII: Searching for Alignment, a considerable gap choosing to adopt a proactive approach. Investorremains between investor expectations and relations can, and should, be used as a source ofmanager perceptions. There is an opportunity for actionable intelligence and will likely require greatermanagers to establish a competitive advantage by investment by fund managers going forward.offering enhanced transparency in areas such ascounterparty 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 20112 Dow Jones LP Source3 Preqin 11
  14. 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,12
  15. 15. 2011 SEI Private Equity Survey: Part Three of Three Turning Client Knowledge into a Competitive Advantage 3
  16. 16. 1 Freedom Valley Drive Oaks, PA 19456 610 676 1270 www.seic.com/ims | managerservices@seic.comThe Investment Manager Services division is an internal business unit of SEI Investments Company. This information is provided for educational purposes only and is not intended toprovide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.©2011 SEI 110952 (10/11)

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