Need To Know

LPs Still Not Happy, Survey Finds

Although limited partners are seeing the balance of power shift in their favor on fund terms and conditions, only a little more than half of them feel that the interests of general partners and LPs are properly aligned, according to a May survey of 50 institutional investors conducted by research house Preqin.

For example, 59 percent of those surveyed said that they had seen favorable changes in management fees over the past year, yet 64 percent of them are still unhappy with the level and structure of those fees.

In addition, nearly three-quarters of the survey’s respondents said that they may not invest in vehicles that don’t follow the Institutional Limited Partners Association’s “Private Equity Principles,” a set of recommendations covering alignment of interest, governance and transparency in fund terms; 13 percent said that they definitely would not do so. Among its recommendations, ILPA advises investors to negotiate distribution waterfalls in which they would receive all their contributions, plus a preferred return, before the GP gets any carried interest. The association also recommends that investors negotiate to receive all transaction, monitoring and related fees, rather than share them with the general partner.

Valuation Gap Remains Big Challenge

That sellers have unrealistic valuation expectations will create the greatest challenge for those in the private equity industry during the next two years, said 34 percent of respondents to a survey of 75 North America-based private equity professionals. The survey, conducted in the first quarter of 2010 by data provider Mergermarket, in association with Houlihan Lokey, also found that 30 percent feel fundraising will be the biggest challenge.

Among other results of the survey, 85 percent of respondents predicted that the overall level of private equity activity in North America will increase over the next two years, with an additional 8 percent believing it will increase significantly. More regulation of the financial industry will strongly drive this increase, said 60 percent of those surveyed.

The sector likely to see the highest rise in deal volume during the next two years is health care, according to 70 percent of respondents. The drivers of this increase include “government funding, increased competition and demand from an aging population,” said a report based on the survey.

Respondents were also asked how “recent economic conditions” had affected their approach to due diligence. Just over half (52 percent) said their approach “has remained consistent over time”; another 48 percent their “scope of due diligence procedures has increased”; and just under a third (31 percent) said that they’re spending more time on due diligence than in the past.