Market Insights

Private Equity: Adapting to Investors’ Modern Needs

Institutional investors expect high levels of reporting, transparency and consideration of ESG from private equity. Managers must adapt and evolve if they want to attract new capital.

April 2022

Private equity is set for a surge of inflows as investors continue to provide fresh capital to the asset class.

Assets under management (AUM) is expected to grow from $4 trillion to more than $11 trillion by 2026, according to Preqin1. The alternative asset data provider also predicts that by then private equity will account for four percent of all private and public equity holdings.

Our research conducted in August and September 2021 to better understand the drivers of private market investments2 found that 8.5 percent of asset owners’ AUM is allocated to private equity. More than half (55 percent) expect to increase their allocations over the next three to five years — more than any other private asset class.

What Investors Look For

Asset owners reported that the potential for capital growth, added value and long-term focus are the top investment attributes of private equity, according to our study.

Our research also found investors want to perform more analytics internally and require greater levels of detail from asset managers — as they have become accustomed to the high levels of transparency provided by public markets.

Private equity will face mounting demands for transparency as the asset class becomes increasingly democratized. The creation of new investment vehicles means it has become accessible to more private wealth and retail investors. Managers risk losing new capital to their peers if they fail to adapt to investor expectations of greater transparency through analytics tools.

ESG Reporting

Considering and reporting on environmental, social and governance (ESG) issues is also growing in importance for investors. In our study, 75 percent of asset managers said they expect the availability of sustainable or ESG-friendly investments will have a positive impact on the growth of private markets investing.

This is crucial given that our research found European asset owners – who are focusing heavily on ESG due to reporting requirements under the Sustainable Finance Directive Regulation – are much more likely to raise their private equity allocation in the next few years than those in other regions. As asset managers focus more on ESG considerations, private equity firms with capabilities to streamline reporting and nonstandard datasets such as ESG metrics will have the opportunity to stand out.

Enterprise-Level Information

Private equity managers often still largely rely on spreadsheets for analysis, conducted on a manual and ad-hoc basis, which can lead to problems in performance measurement and reporting to company management, investors and regulators.

For example, spreadsheets may be used for waterfall calculations that define how returned capital will be divided among investors and fund managers. Incorrect or incomplete data can create significant issues or even lead investors to pull out during the negotiation period.

Holding data in disparate and siloed systems requires resource-intensive and cost-ineffective calculations to obtain an overall portfolio view. For example, if there is a shock to the healthcare sector, managers would need to examine separate spreadsheets and databases to ascertain their private exposures, before adding them to the more instantly available public exposures.

A Centralized Data Platform

Our study found that more than two-thirds of asset owners say having to deal with private markets data problems creates significant opportunity costs. As asset owners and managers increasingly explore opportunities in the private markets, they need a solution they can scale across their portfolio.

State Street AlphaSM for Private Markets helps asset managers and asset owners centralize data, ensuring an enterprise-wide single source of truth, while managing the entire lifecycle of their private allocations and benefitting from improved risk modelling.

The Alpha for Private Markets platform helps asset owners create ideas and insights and take tangible actions, while allowing them to spend less time searching for their data. It also provides an enterprise solution to help private equity chief investment officers and chief risk officers with top-down asset allocation and executive decisions, enabling them to look at data holistically and act.

At a time when private equity is set for huge growth, the sector must adapt and evolve to investors’ emerging needs. As themes such as reporting, transparency and ESG considerations take center stage, asset owners and managers must be ready to meet the demands of a new wave of sophisticated investors.

 

Footnotes:

[1] 2022 Preqin Global Private Equity Report, January 2022
[2] State Street Alpha Private Markets Study September 2021