Investors Want to Add New Managers to Their Private Equity Rosters

Even in a down market, private equity investors are looking for new, untested managers. 

More than 80 percent of private market investors are actively looking to establish relationships with managers — both emerging and established — with whom they’ve never worked, according to the latest report by Silicon Valley Bank. And even if an established manager has a longer track record and more experience dealing with market downturns, that doesn’t mean they have an obvious upper hand in the fundraising competition. Only 16 percent of these investors are looking exclusively for established managers, while 81 percent are open to working with both established managers and newer faces in the industry.

In an interview, Alex Ardente, director of limited partner relations at SVB, said that despite their enthusiasm, investors are still more careful about due diligence with managers with whom they’ve never worked.

It may take months for an asset owner to actually make a commitment after they've met for the first time with a new manager, added Jesse Hurley, head of SVB’s global fund banking practice. “[Investors] want to make as many new connections as they possibly can, so that when they’re ready to make an actual dollar commitment, they have a great pipeline [with which] to do so,” he said.

SVB based the results on a survey of 56 private market investors, including pensions, endowments, and family offices. The survey was conducted from July 21 to August 21. More than half of the respondents have allocated over 30 percent of their assets to private equity.

The stock market downturn has left many big investors over-allocated to private markets and has led to a crowded fundraising environment. During times of heightened volatility, some investors are more inclined to work with managers they’ve known for a long time, which has benefited the largest buyout funds. The SVB report, however, painted a much more positive outlook for up-and-coming managers and those without an expansive network in the industry. 

Strategy and process are the most important factors that investors pay attention to when selecting managers, according to SVB. Sixty percent think prior fund performance is among the top three most important factors when they assess new managers.

Investor enthusiasm about meeting new firms is due in part to their continued interest in private equity overall. Despite downward-trending valuations, only 6 percent of investors have decided to decrease their target allocation to PE. Twenty-four percent of investors plan to increase allocations, while 70 percent will keep their targets unchanged, according to the report. 

“This commitment to private markets may be explained by lessons learned from the past,” the report said. It added that research has shown that investors would be better off maintaining PE allocations throughout cycles rather than trying to time the market. PE allocations are also relatively sticky, with investors’ money tied up for many years unless they sell their stakes in funds in the secondary market.  

“It’s a robust asset class that [investors] are willing to continue to support and view as an alpha-generating type of financial product,” Ardente said.