eVestments, a leading provider of cloud-based solutions to the institutional investing community, recently released its 2017 Private Markets Investors & Consultants Due Diligence Survey. Participants included private markets investors, institutional investment consultants and fund of funds managers representing total assets under management of USD 2.2 trillion and total private markets assets of USD 316 billion.
According to the survey, investors considered Team, Strategy, and Track Record the three most important factors when evaluating a manager. A majority of investors would also like to see more data and standardization among private markets managers so that they could compare them more easily. Respondents are becoming increasingly sophisticated in due diligence and Public Market Equivalent (PME) analysis.
Graeme Faulds, eVestment Director of Private Equity Solutions, said: “Among experienced private markets investors responding to this survey, there’s still a clear majority looking for more data and a more consistent way of evaluating fund performance. Interestingly, while the structure or level of fees are not necessarily a concern for respondents, understanding the impact of them on performance is. When considered alongside the factors stated as being of utmost importance to them in due diligence, it highlights respondents’ desire to dig in to track records and better understand what is driving managers’ returns.”
The survey found that only 40% of respondents find it “easy to compare one fund manager’s performance numbers with another on a fair and consistent basis,” a considerable improvement on last year’s 22%, but some way behind the 60% that still find it difficult.
When evaluating a manager’s due diligence process, 96% of investors consider “team” as extremely important, followed by “strategy” with 79% and “track record” with 77%. “Media and government focus” came in fourth at 38% and ESG (environment, social and corporate governance) limped home with a mere 6% importance ranking.
When it comes to concerns for private markets in 2017, “future performance” (14%) and “competition” (12%) are less important to investors than “valuation” (48%) and “dry powder” (26%). The 10% ranking given to regulation, political instability, access to managers, and fees, suggests that these issues are of little concern to most respondents.
When it comes to track record analysis, on the other hand, fees get a whopping 85%, putting them in first place.
As for expected change in allocations in 2017 compared to 2016, respondents see private debt gaining momentum in their private markets portfolios, with an average stated increase of 17.4%, followed by 4% in private equity and infrastructure. Respondents expect to disinvest in private equity real estate (-6.2%) and venture capital (-6.7%).
In terms of trust in the performance numbers of private markets fund managers, 4% of respondents always trust the numbers, and 74% often do. However, 43% always recalculate them, while 33% often do. An increasing number of investors are using private market equivalent analysis (PME), 81% as opposed to 69% in 2016.
Survey respondents are overwhelmingly located in North America (79%), followed by EMEA (15%) and Rest of the World (7%). Distribution of institution type was LPs 60%, Fund of Funds 23% and Investment Consultant 17%.