29% of LPs have decreased interest in emerging managers – survey

The survey was conducted online from 30 November to 10 December 2020 and includes the responses of 61 institutional LPs from around the world. Eaton partners Jeff Eaton and Peter Martenson discussed the survey results in a webinar held on 17 December 2020.

Debut managers have faced more hurdles than usual in 2020. Almost two thirds (64%) of the LPs surveyed said that their interest in debut managers had remained “about the same” in 2020, and 7% said that it had increased. However, 29% of LPs said that they were now less interested in debut managers, reflecting the flight to quality and certainty seen in 2020.

The survey touched on the difficulties of LP-GP meetings in 2020 and LPs’ attitude to virtual communication. The vast majority of LPs said that “virtual meetings are just a backstop until Covid is behind us and travel opens up again”. One fifth of LPs said that they found virtual meetings to be “very effective” and an acceptable substitute for in-person meetings. However, one in 10 LPs said that they have not made, and will not make, investments without physical meetings.

Eaton said that, prior to the crisis, it took 27 points of contact on average between a GP and an LP to close a commitment; this rose to 42 during the coronavirus pandemic, he said, implying that one physical meeting is the equivalent of two to three virtual meetings.

In a year where LPs and GPs have had significant difficulties in meeting, the track record of the managers in question has been the most important factor for LPs in evaluating potential investments, the survey found. This factor was cited as the most important by 72% of LPs, with just 2% choosing fund size, and a further 2% naming fees and terms. A quarter of LPs surveyed said that another factor was the most important. Eaton suggested that this could, for example, be the composition of GPs’ management teams.

Following a challenging year for fundraising, the majority of LPs expect fund closes to increase in 2021. Almost a third (29%) of the LPs surveyed said that they expect an uptick in fund closes in Q1 2021, while 23% said that this uptick could fall into Q2. A fifth of LPs expect that this anticipated increase could be more concentrated in H2 2021. However, 28% said that they felt it was too early to predict when final closes will pick up due to the ongoing uncertainty.

Winning strategies
Reflecting on a difficult year, 56% of the LPs surveyed felt that the performance of their private capital markets portfolio had been stronger than anticipated in 2020, while 26% felt it was weaker and 18% said it was about what they expected.

Looking to 2021, 44% of LPs said that they intend to increase their private capital markets allocations modestly in 2021, A similar proportion (43%) is planning for no change currently, and 13% intend to increase their allocation significantly

The survey gauged LPs’ views on different private equity strategies, asking them which strategies would be of the most interest or of the highest focus for them in the first few months of 2021. The question allowed for multiple selections in LPs’ responses. Buyouts remained the most popular strategy, with 48% of LPs selecting this. Venture, meanwhile, has increased in popularity, with 40% of LPs choosing this strategy. Martenson noted that this figure was likely to have been around 10-15% around five to 10 years ago. Meanwhile, private credit (37%), special situations (33%), real assets (33%) and distressed strategies (32%) also remained important for LPs.

As in previous surveys, private equity vehicles remain popular among other private market strategies. Looking at alternative asset classes, 62% of LPs said that they expect to allocate the most capital in 2021 to PE, while 15% named private credit as their top strategy and 23% named real assets. Eaton and Martenson noted that private credit has proved more popular in previous surveys; they added that the return profile of this strategy has traditionally been more compressed, while PE has regularly outperformed.

In the next year, the majority of LPs (76%) expect their private markets investments to exceed or meet their benchmark, with an even split between both expectations. Just 3% of LPs said that they expected their returns to be below their benchmark. A significant minority remained uncertain, however, with 21% saying that they were not yet sure how performance would fare.

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• Topics
• LPs
• Benelux
• CEE
• DACH
• France
• Southern Europe
• UK / Ireland
• Fundraising
• coronavirus