Asset Owners Still Want Private Equity — But They Want These Changes

Investors want more transparency, including on risk and valuation.

iStock Photo

iStock Photo

While allocators are still putting capital to work in the private markets, they’re getting choosier about the funds and direct investments they’re considering — and they want more information on the ones already in their portfolio.

These were the takeaways from a survey from State Street Corp. of 480 managers, insurers, and asset owners globally.

According to the survey, 68 percent of all respondents — and 78 percent of asset owners — will continue to allocate to private equity at the same clip as they had planned.

“2022 was a transition year,” said Jesse Cole, global head of private markets at State Street. According to Cole, investors will be particularly cautious with direct private equity investments. They’ll do a lot more due diligence.” The survey bore this out — 51 percent of asset owners and 52 percent of insurers ranked enhanced due diligence as one of their top concerns.

The survey showed that 53 percent of asset owners said one of their biggest concerns when it comes to private equity operations is the transparency of data available. What’s more is that 46 percent of asset owner respondents said that they are requesting more detailed information on investments than what is typically provided.

“One thing that’s tough is that these valuations tend to be three months in arrears,” said Jessica Donohue, global head of State Street’s asset owner segment. “You’re comparing private markets of three months ago with public markets of today and you’re putting that all together in a performance or risk report.”

Half of the survey respondents believe that valuations have not adjusted to current market conditions — a clear demonstration of the industry’s ongoing debate over marking private equity assets.

Donohue added that limited partners want to know about the risk in their portfolio exposures today versus three months ago, and how that is affected by recent volatility in the markets. They also want more information on ESG metrics, including country exposures from a risk perspective.

According to Cole, asset owners want to know what the net asset value or the value of their capital account is. “In those regards, we really need to move to a daily booking model,” he said. He stressed the importance of this model being automated and requiring “no fingerprints” to allow the accounting model to remain accurate and in balance.

“You need to make it easier for [LPs] to subscribe and get reporting,” Cole said. “Cap statements, notices, it’s all very bespoke. They all have different formats and timings. We need to spend time creating a bit more of a digital experience for LPs either coming directly from a company or via a GP.”