Is the Gig Up?

On an annual basis, Probitas Partners conducts a Survey of institutional investors in order to gauge their opinion on key trends in the private equity market. We recently contacted approximately 4,000 institutional investors and received 359 individual responses from a mix of Pension Plans, Funds of Funds, Endowments & Foundations, Family Offices and Financial Institutions.

One of the most interesting set of responses we received focused on how institutional investors perceive third party investment in Private Equity Management Companies. The largest transaction of this type in the last year was of course Blackstone’s public offering, though a number of private transactions were also done and Apollo is now in the market with a public offering.

Institutional investor opinion on this trend is decidedly mixed. The greatest concern of current investors in private equity funds is that such investment raises the issue of potential conflicts of interest between them and investors in the management company. Though 65.2% of respondents held that view (by far the biggest response in the Survey), 14.6% of respondents thought that the trend raised interesting investment opportunities. Some 21% of respondents also felt that the trend was a natural response to succession issues arising at private equity funds.

When breaking down respondents by type of institution, it was noticeable that interest in investing in management companies was higher amongst larger investors, with 20.7% of respondents from institutions looking to commit more than $1 billion to private equity during 2008 intrigued by the investment opportunity.

Some of the most strongly expressed individual opinions in the entire survey, collected as part of the Other responses, were also made in response to this question. A selection of these responses below is revealing of the degree of skepticism to which certain investors view the issue:

· Suggests that general partners believe the gig is up on fees, carried interests and current market valuation. Managers don’t sell shares unless they are significantly overvalued.

· Is a sign that investment houses have become asset managers.

· Was an opportunistic fad to capture value by fund managers during an anomalous period of success.

· Is a sucker’s game…

Those interested in complete copies of the Survey can contact me at