The investor-fund manager dynamic
The relationship between investors and fund managers is absolutely crucial to the private equity and venture capital model. At the BVCA Summit, we explored how it might change in the years ahead.
The audience at the BVCA Summit were asked to vote on whether the current private equity and venture capital environment is more favourable to investors or fund managers (or Limited Partners (LPs) and General Partners (GPs) to use industry lingo).
Almost half (47%) voted in favour of LPs. This compared to 41% for GPs and 12% seeing the situation as equally balanced.
Yes, there were a few more GPs in the room than LPs (although institutional fund investors numbered over 100 on the day). Even so, given the huge growth in private equity and venture capital over the past decade or more, that is a notably balanced picture.
This may reflect the relative resilience of fund terms to market dynamics. It may also mask nuance, whereby established GPs may be more focused on fund terms than new managers, who may be more focused on attracting capital.
Such emerging managers have become a major feature of the private equity and VC landscape: there are five times as many emerging managers in the market today as there were 10 years ago. This is very good news for the industry itself, with a constant and healthy supply of new models and structures disrupting the marketplace. It also provides opportunity for new LPs seeking good terms and new relationships.
From this capacity for renewal and reinvention we are seeing the very structure of limited partnerships changing, with more long-duration funds coming online. This, in turn, will mean companies could stay in private hands longer, perhaps indefinitely. There is also an expectation of retail investor-friendly investment structures, opening the door to ever wider participation in the fruits of alternative investment.
Such variety is only to be expected, given the rise of private equity, which has grown its aggregate NAV 7-fold since 2012, compared to a 3-fold increase in public markets. And there is absolutely no sign of the appetite waning.
For LPs the private equity investment universe is getting bigger in a literal sense. Delaney Brown, head of private equity funds at CPPIB, said the group intends to have a third of its portfolio in emerging markets by 2025. This ambition was reflective of a broadening of geographic interest, with China and India, as well as Africa, the key beneficiaries.
There is also a return to prominence of venture and growth capital, currently constituting about 40% of the fundraising market: a proportion that would have been “unthinkable” a few years ago according to one Summit speaker.
More generally, the mass capital inflow over the past decade has not matched been matched by an increase in opportunities (one Interesting side note — one speaker suggested it seems to be easier in the current market to raise £3 billion than £300 million).
Whatever the actual balance of power in the GP-LP relationship, investment executives will have their work cut-out as competition for both funds and Investments mount between fund managers.
