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Limited Partners Redefine their Role in Private Equity, Working With Fewer GPs and Making More Direct Investments

December 15, 2016

Limited Partners Redefine their Role in Private Equity, Working With Fewer GPs and Making More Direct Investments  

Direct investments by LPs hits highest level since 2007, according to PitchBook’s 2016 LP Report


SEATTLE — December 15, 2016 — Direct investments into private companies by limited partners (LPs) has reached the highest level since 2007 as LPs develop more sophisticated strategies and look to manage and reduce existing fee structures. According to recent analysis conducted by PitchBook, nearly $103 billion worth of private market transactions involved direct investments by LPs through the second quarter of 2016, the largest amount of direct investments by LPs since 2007. At the same time, LPs participated in 103 completed transactions through the second quarter of 2016, putting their participation in private market deals on pace to be 56% higher than the 125 transactions recorded in 2014. Additionally, U.S. transactions led by LPs are on pace to come in higher than the 27 counted last year. Largely driving this trend are public and corporate pensions like the Ontario Teachers Pension Plan and the Canada Pension Plan Investment Board.


PE & VC commitments: LPs shift their strategy

Limited partners’ confidence in these private asset classes remains strong. Through the third quarter of 2016, 90% of PE funds closed at their stated targets, the highest amount ever recorded by PitchBook. While private equity and venture capital fund managers had little trouble hitting their targets, the median time to close increased considerably in the third quarter. This contrast is likely a symptom of fund managers raising fewer, larger funds, evidenced by elevated median private equity fund sizes in 3Q 2016.


Committed capital into the private asset class has grown significantly over the last five years, up 53% from 2010. Further, the data indicates that LPs are continuing to redefine their strategies by investing in fewer fund managers and writing bigger checks. Through the first quarter of 2016, the median commitment size reached a massive $50 billion, the same figure recorded in 2015 and a decade high. Partially driven by greater awareness around management fee structures, this trend illustrates one way that LPs are looking to manage and reduce their existing fee structures.


The venture markets have experienced similar trends. The count of LP commitments is down while the total amount of capital committed remains high. Through the second quarter of 2016, LPs committed capital to 98 venture capital funds down from the 144 commitments recorded in 2014. The median commitment size came in at $15 million, down from the last two years, but still relatively high compared to historical figures.


Distributions outpace contributions for fourth consecutive year

Throughout the last four years, GPs have distributed nearly $200 billion back to U.S. public pensions, while they only called down $155 billion from LPs. This jump in distributions likely stems from a successful cultivation of assets following the 2008 financial crisis, resulting in consistent distributions back to limited partners. At the same time, public pensions have seen distributions grow by 3.3x since 2010.  With distributions like that, it’s likely pensions will funnel that capital right back into private fund managers.              


Download the full report here: http://reports.pitchbook.com/2016-us-institutional-investors-pe-vc-allocations/


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