Big Investors Demand More Transparency From Private Equity — or Else

April 01, 2016 at 10:25 AM
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State Street reported this week that 59% of institutional investors globally intend to raise their allocations to private equity over the next five years.

However, they insist on more transparency from managers, and 28% said that if they do not get it, they will cut back on their investments.

State Street's findings were based on a poll conducted in December of 118 institutional investors.

Private equity assets hit a new high of $2.4 trillion in June, according to State Street.

Seventy percent of investors surveyed demanded increased levels of transparency from private equity managers on the performance of the underlying assets in each portfolio. 

Forty-six percent wanted greater read-through on risk exposures, 32% on net asset values and 23% on fund cash flows. 

Investors cited the following issues as the biggest obstacles to increasing their direct exposure to private equity funds:

  • Illiquidity: 70%
  • Lack of investment transparency: 38%
  • Lack of in-house expertise: 29%
  • Regulation: 24%

"Both asset owners and asset managers require enhanced data and analytics solutions to demonstrate increased levels of transparency of underlying assets and risk exposures," J.R. Lowry, head of State Street Global Exchange in Europe, Middle East & Africa, said in a statement.

"It is very clear from our research that failure to provide sufficient levels of transparency increases the risk of driving asset owners away from investing in private equity."

In September, State Street rolled out the State Street Liquid Private Equity Investable Index, designed to be used as a liquid proxy for direct private equity investment. The index comprises some 2,400 private equity funds with more than $2.2 trillion in capital commitments.

"Some [investors] will prefer a liquid return stream similar to private equity that satisfies their asset allocation requirements without the traditional impediments of illiquidity, lack of investment transparency and large minimum investments," Lowry said.

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