The perfect LP base: All new flavours

You can read the first part of our LP series here

While Middle Eastern LPs are largely withdrawing from illiquid investments off the back of the oil market collapse, Taiwanese and Korean insurance companies and pension plans are among the largest LPs replacing them, typically commanding a total of $8-20bn AUM. US mid-tier investors and family offices that have not accessed European private equity before are feeling compelled to diversify out of their US base exposure and are going into Europe as a result.

"The LPs pushing into Europe are a mixed bag because, while you have a slowdown of investors coming from China or the Middle East, other investors are flush with cash," says Sunaina Sinha, founder and managing partner of placement agent Cebile Capital. "Those LPs are mainly north and east Asian, where insurance companies, multi-family offices and single-family offices are most active and are diversifying due to local market volatility. Australian LPs continue to be active and Latin American investors are increasingly taking an interest," she says.

Taiwan and Korea are leading the charge into private equity from Asia, with investors, such as Cathay Life and Singapore Management University, among those diversifying into European funds. Sovereign wealth funds, pension funds and insurance companies flush with dry powder – amassed from decades of strong economic growth – are looking to diversify away from an increasingly China-exposed local region. At the same time, they are also diversifying from a heavy reliance on mainly local real-estate investments that are no longer providing adequate returns as their capital reserves increase.

The LPs pushing into Europe are a mixed bag because, while you have a slowdown of investors coming from China or the Middle East, other investors are flush with cash" – Sunaina Sinha, Cebile Capital

Australian LPs find themselves in a comparable situation to the Taiwanese and Korean investors, as the country's economy has strong ties to the Asia-Pacific region and is moved substantially by the region's macro fluctuations.

From South America, Chilean financial institution Bancard has been registering its interest in European private markets, but multi- and singly-family offices are also among those looking to put capital to work away from their own continent's volatile economies.

New LPs emerging locally in Europe include groups of smaller pension funds, such as the London Pension Funds Authority and the Local Government Pension Scheme (LGPS), looking to access a broader section of the market through the ability to commit larger blocks of capital to GPs. The UK's grouping of pension funds forms part of an effort to increase the firepower of the 89 local pension schemes' capital, while bringing down costs and resources.

However, the LGPS has not been without controversy. Chancellor George Osborne has sought to gain influence over the fund's investment policy and the UK government may impose regulation to compel the LGPS to follow its guidance, such as forcing an allocation of 25% to UK infrastructure projects – despite the scheme being a defined contribution vehicle and not government money.

Big-name pull
Non-western investors looking to break into the space almost exclusively invest in the top end of the private equity market, as these GPs' size and reputation are attractive to LPs making their first forays into a relatively unknown market. "There's a clear trend of investors coming into the market who exclusively focus on managers with more than €1bn," says Sven Lidén, CEO of fund-of-funds manager Adveq.

There's a clear trend of investors coming into the market who exclusively focus on managers with more than €1bn" – Sven Lidén, Adveq

"What I see in Asia, and from speaking to investors out there, is that, generally, the minimum ticket is €100m and anything below that is not really meaningful. But because they don't know the private equity world that well, these LPs don't want to be more than 5%, 10% or 20% in a fund and often limit themselves to managers of more than €1bn."

Because the broader European private equity market remains relatively unknown to the emerging LPs moving capital into it, they initially gravitate toward the 10 or 20 largest funds first, through primary fundraising, rather than the secondaries market. As the LPs' knowledge of the market develops, they may eventually seek exposure further downmarket.

"They're looking at the big five fundraises in Europe in a given year," says Sinha. "Large, safe, household-name GPs in Europe are always their first port of call."

Her view is supported by Lidén: "The flow to our mid-sized managers hasn't changed that much. Many larger players from other continents will run directly to the big fund managers and give them large tickets and I think that's probably the bulk of new money coming into Europe."

However, Lidén warns that the increased demand for large-cap funds could negatively impact the market segment: "New investors make the bigger guys bigger, which could, however, make them potentially inefficient because there's a risk they will be saddled with too much cash.

"In that segment as a whole, the influx of cash is not a healthy development."

Meanwhile, the emerging pools of European capital may not be contributing to that trend as much, as LPs local to the region access the market in a different way to outside investors. "They're still the same investors, they're just grouped together differently," says Lidén of the emerging British pension fund pools. "However, they may have appetite for exploring opportunities with smaller funds than the big LPs coming in from outside Europe."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• LPs
• Fundraising
• LP selection series
• Top story