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Survey: PE Investors Seeking Performance + Disclosure

A new survey of private equity professionals reveals that the growth and popularity of private equity has been coupled with expectations among investors for better disclosure and accountability. Topping a list of 12 factors investors looked for when choosing a private equity firm was the quality of its management team, followed immediately by the clarity of its investment philosophy. In third place was investment performance, rising in importance from 2009, when an earlier version of the poll ranked performance seventh among the 12 factors. Portfolio transparency and fee structure also ranked highly among investors.

The survey of 411 investors, fund managers and advisers was compiled by SEI, a financial outsourcing solutions provider, and Greenwich Associates, a financial research and strategy firm. Forty-nine percent of respondents were from North America, 30 percent in Europe and 21 percent from Asia, Latin America and other parts of the world.

“Managers are facing greater performance pressure, greater fee pressure, and greater transparency expectations. They have to increase their… effectiveness if they hope to meet the greater demand for value,” said Ross Ellis, a vice president at SEI in a statement that accompanied the results.

Data from the survey show a sharp divide between investors and consultants regarding the main motivations for investing in private equity. Among investors, 68 percent pointed to returns as the primary reason to invest in PE, as opposed to just 18 percent who cited diversification as the most important goal. The results were nearly the opposite among investment advisers, nearly 50 percent of whom pointed to diversification as the primary goal, against just 10 percent citing returns.

Although 73 percent of investors had no plans to change their PE allocation targets in the next year, those that planned to increase their PE target outnumbered those planning to decrease it by a factor of 14 to one, a strong vote of confidence for private equity’s future. Among respondents planning to increase allocations, more than half said they planned to increase their target by 1 percent to 2 percent.

Overall, the average allocation to private equity among investor respondents was 7 percent, close to the 6.1 percent allocation that Greenwich reported in 2009. Among institutional investors, family offices reported the highest allocation to private equity, at 10 percent. Public pension funds were at the bottom of the list, reporting an average 3 percent PE allocation.

Part of private equity’s rise in popularity, according to the survey, was the increasing value of exits, responsible for the return of cash that investors can reinvest. In the second quarter of 2011, the more than 300 exits were worth upwards of $120 billion, according to data provider Preqin, a sharp increase over the $81.5 billion in exits from the same period in 2010.

Lastly, the survey pointed to the growing use of the secondary markets. Fifty-eight percent of institutional investors said they used secondary markets either to buy or to sell private equity assets. Their rise in popularity has gone hand-in-hand with the rise in secondary prices, which in some cases have attracted bids at or above par value.