A sizable share of private equity investors believe the asset class has become more liquid, but few believe the advances are sufficient to meet current needs, according a survey by SEI titled Solving the Private Equity Liquidity Challenge: a Work in Progress.
SEI’s Investment Manager Services division is a global supplier of customized operating infrastructure and services to investment organizations representing more than $13tn in assets under management.
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Among the 212 individuals surveyed, nearly half (47%) of general partners (GPs), 36% of limited partners (LPs), and 33% of consultants agreed that the private equity market is "more liquid than it used to be and will continue to become more so."
Still, only 22% of GPs, 19% of LPs, and 17% of consultants said the industry’s liquidity needs are currently being met.
SEI’s investment manager services division senior vice president and managing director Jim Cass said, "In the past, investors accepted a lack of liquidity as part of the price they paid to access private equity opportunities, but attitudes and expectations are changing. The expansion of private equity trading venues, escalating institutional demands, and broadening market participation have combined to transform the face of the industry."
According to the survey, the growing secondary market for private equity investments has played a major role in the easing of liquidity constraints.
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By GlobalDataOnce associated with the sale of troubled assets at deep discounts, the secondary market has become mainstream, with 2014 global transaction volume expected to surpass $30bn, according to Private Equity International.
Fifty-eight percent of LPs and investors in the survey said they have bought or sold assets on the secondary market, and a majority of all respondents said participating in the secondary market is "no longer taboo" for investment professionals.
Rising valuations have been a key factor in the growth of the secondary market, the report states. A majority of all respondents said the market is fairly valued, however, more than half of the LPs surveyed saw the market as overvalued.
Only 1 in 10 respondents said the market is currently undervalued. Most respondents expressed concern with the valuation process, with only 8 percent agreeing that it is "generally fair and accurate."
Survey results show 4 in 5 respondents described the quality of valuations as "variable."
Other key factors in the improving liquidity picture addressed in the survey include:
-The growth of publicly traded entities with underlying private equity investments- Though most respondents saw this trend as ongoing, they expressed concern that the exposure provided by such listed entities may differ from that of traditional private equity investments. Eighty-two percent agreed that publicly traded private equity firms "are not a good proxy" for the asset class.
-The development of private equity mutual funds and Exchange Traded Funds for retail investors- While a majority of respondents said they expect these to remain "niche products," 32 percent predicted they will gain importance in the private equity landscape.
Cass added, "The rapid evolution of private equity vehicles and trading venues only adds to the complexity of the operating environment for asset managers. Many private equity managers are already struggling with escalating compliance, transparency, and reporting demands, all of which can distract investment organizations from their core mission. To be competitive in the years ahead, managers will need to adapt their operating infrastructure to meet a more challenging business climate."
