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What Private Equity Investors Get Wrong

Investors in private equity are great at choosing investments and keeping track of returns — but they fall short in negotiation and monitoring, according to eFront.

Investors struggle with negotiating with private equity firms and monitoring those private equity investments, new research from software provider eFront shows.  

While limited partners, or investors in private equity funds, excel at asset allocation and using sophisticated metrics to measure returns, they still aren’t following best industry practices in all categories, according to a survey of 179 private equity investors from family offices, pension plans, and every institution in between. 

“In the sector, we are sometimes extremely surprised to see how rudimentary the practices used by players seem to be,” said Thibaut de Laval, chief strategy officer at eFront, by phone on Thursday. “We thought it would be interesting to look at the process of LPs and how they invest in private markets, especially at the time when they are increasing their exposure to private markets or entering them at the first time.” 

It turns out that while limited partners can handle the basics of their job — choosing assets to invest in and keeping track of returns — they aren’t great at the minutiae, the report showed.  

According to the survey’s results, 35 percent of respondents do not attempt to seek better alignment with the general partners, or fund managers. Just 10 percent of respondents seek segregated accounts or the option to make a final decision on capital deployment, both of which could likely benefit allocators in the long run, the survey found.  

These point to the fact that limited partners don’t tend to negotiate with private equity firms, the report showed.  

“An LP is shy when they approach negotiation with the GP,” de Laval said. “They don’t know what they could be doing.” 

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Limited partners are also not keeping up with monitoring their investments, the report showed. More than half of respondents said they use the simplest form of monitoring their position in private equity funds.  

Similarly, a large group of limited partners – 45 percent – are accepting the information they receive from general partners on their investments without doing any further analysis.  

According to de Laval, successful allocators “go much deeper than that, drilling down to the financial assets to manage the skill of their investors.”  

De Laval said that this group could benefit from doing more in-depth analysis to improve their best practices.  

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