Asset Owners Seek Enhanced Role in Private Equity Investments

Asset Owners Seek Enhanced Role in Private Equity Investments

July 2020

By Megan Gentilesco

Recent market volatility may accelerate asset owners’ interest in becoming more directly involved in their private portfolios.

In recent years, there has been a trend of increasing sophistication among asset owners. As these investors – including sovereign wealth funds, government and corporate pension funds, as well as endowments and foundations - become more fluent in private equity, many are keen to play a greater role in their private equity investments. They are changing the way they work with private equity fund managers and in some cases acting more like asset managers themselves.


The recent market turmoil may have brought these objectives into sharper focus for some asset owners as they sought information about their investment in a rapidly changing environment. However, the drivers of this trend are both long-standing and varied.


Many asset owners wish to enhance transparency and are structuring their investments to help them achieve this. Some are eager to lower costs and avoid the 2% management fee and 20% performance or ‘carry’ fee structure that is common in the alternative asset space. Other asset owners have invested in alternatives for decades and believe they are sufficiently knowledgeable about the asset class’s nuances to invest themselves – and outperform many private equity funds.


In certain cases, there may also be a regulatory driver for change. In both the UK and Canada, legislation has encouraged the merger or pooling of local government pension funds to create not-for-profit asset managers that can help to build scale in the local government pension sector by providing asset management to other funds. Similarly, even without regulatory changes, a select number of large Asset Owners have started to position themselves to manage 3rd party assets, such as for other for non-profits or government entities.


A Spectrum of Approaches

Depending on their level of sophistication, asset owners may choose different paths: there is no single right approach as each asset owner has different objectives, resources, history and experience.


Some asset owners may seek to limit the number of managers they invest with and have a greater role in decision making and deeper engagement with their chosen asset managers. By concentrating their investments, asset owners are striving to increase their bargaining power with a set of critical partners – helping them secure more favourable financial terms, transparency and control.


Other owners may wish to co-invest alongside private equity funds – an increasingly popular strategy in the past five years – in order to reduce fees, improve performance and build stronger asset management and analytical skills internally.


In some cases, the most sophisticated asset owners have decided to build teams by hiring people from private equity firms. These teams aim to identify and pursue direct investment opportunities; either on their own, with other large asset owners, or in partnership with asset managers.


How Private Equity Firms are Responding

Private equity firms are responding to asset owners’ demand for an enhanced role, greater transparency and involvement with a variety of approaches.


Many private equity managers are working to deepen their relationships with key institutional investor clients. For example, separately-managed accounts – or “funds of one” - have become more common as asset owners and private equity managers build closer relationships. In this case, investors generally have greater input into the investment strategy, as well as greater transparency into the underlying private investments held within their accounts.


Many managers are providing their investors with increased access to co-investment opportunities. This may be through informal arrangements or, in some cases, codified in side-letters with certain key investors. Investors appreciate the opportunity to increase their investment size at (typically) more attractive fee rates while at the same time gaining enhanced transparency into their investments.


In other instances, some managers (particularly smaller or first-time managers) may become more specialized, focusing on niche opportunities that allow asset owners to access markets or strategies that may not be readily available for direct or co-investment.


At the same time, the majority of managers are increasing the transparency with which they report to their investors. For some, this means providing Institutional Limited Partners Association notices and templates, while others may provide more in-depth updates from their deal teams during quarterly calls. Investors are using this new information to help them better understand their portfolio through various lenses, including risk, performance and liquidity.


Investment in Infrastructure and a New Mind-set

As asset owners become more directly involved in their private portfolios they may need to make changes to their existing infrastructure and administrative arrangements.


At a basic level, as asset owners become more sophisticated they will want to gather more information about their investments. This can include visibility into portfolio company investments, ESG information, or more granular accounting information on co-invest and direct holdings. Existing accounting technology may need to be replaced or updated, either by building a solution or partnering with an outside provider. For example, if a manager develops a significant real estate portfolio, they may decide to utilize specialized tools to monitor their occupancy statistics and tenant data.


As asset owners pursue direct investments, they may find their accounting needs multiplying, with additional financial reporting requirements for the myriad of special purpose vehicles attendant with private equity investing. This can require increases to staff numbers, deployment of specialized technology, or the identification of appropriate partners to help with these administrative burdens.


Market Turbulence is Amplifying Investor Demands

As the alternatives industry works through the recent market turbulence, early indications are that investors may see this as an inflection point to secure increased transparency. From gathering information to assist in various risk and performance scenarios, to launching separately-managed accounts with trusted asset managers, initial feedback is that investors are keen to further the gains they have made in enhancing control in recent years.


At the same time, many managers are benefiting from having built deep relationships with select asset owners. In the current environment, asset owners seem to be focusing on known entities, and concentrating investment with asset managers where they have established relationships – both through the launch of new separately managed accounts or investment into newly launched comingled funds. In some cases these relationships have allowed asset managers to quickly launch targeted funds designed to take advantage of current market turbulence.


The months ahead will be a test for asset owners and asset managers alike. Recent market pressures will undoubtedly change the relationship between asset owners and asset managers. Although the exact evolution of those relationships is unclear, initial feedback indicates that the desire for increased transparency and control will help define some of the changes ahead.

Megan Gentilesco

Global Head of Private Equity Fund Services, BNY Mellon


BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used to reference the corporation as a whole and/or its various subsidiaries generally. This material does not constitute a recommendation by BNY Mellon of any kind. The information herein is not intended to provide tax, legal, investment, accounting, financial or other professional advice on any matter, and should not be used or relied upon as such. The views expressed within this material are those of the contributors and not necessarily those of BNY Mellon. BNY Mellon has not independently verified the information contained in this material and makes no representation as to the accuracy, completeness, timeliness, merchantability or fitness for a specific purpose of the information provided in this material. BNY Mellon assumes no direct or consequential liability for any errors in or reliance upon this material.


©2020 The Bank of New York Mellon Corporation. All rights reserved.

Ready to grow

your business?

Speak to our team.

Ready to grow your business? Speak to our team.