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The Dynamics of the Limited Partners…

By Serge Ejzenberg
Posted Sep. 22, 2006

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Limited Partners you mean LP's??

There are roughly 3 200 LP’s active.
These LP’s have a combined aggregate allocation of approximately $ 1.3 trillion…

For those who are not familiar with the Private Equity a brief explanation of the players may be required.

Limited Partners (or LP's) are the main provider of cash to Private Equity class asset.

All the big private equity funds, all categories (Venture, Buy Out, Secondary etc &) need to collect or to "raise" money to establish a fund; they submit a "business plan" generally named Private Placement Memorandum (PPM) to the LP's.

Based on the information provided (funds performance, quality of the deal flow, team, exits, etc &) the LP's conduct a due diligence of the fund.

The positive result of this due diligence will lead to an investment into the fund (sometimes political, strategic issues are to be taken into account; pure logic doesn't exist in this world &)

To briefly summarize, the funds providers are named LP's and the team managing the fund are called General Partners (GP's).


Evolution of the LP's:

The private equity class in booming. New LP's are entering the market, while existing LP's are becoming more sophisticated at managing their portfolios and are increasing their target allocation.

Few LP's are retiring or reducing their allocation.

Over a period of twelve months roughly $ 320 billion has been committed to new funds by private equity investors.


The LP's Universe:

Even if its cumbersome to exactly number the LP's worldwide, several available data estimate that there are roughly 3 200 LP's active.

These LP's have a combined aggregate allocation of approximately $ 1.3 trillion &

New LP’s are continually entering the asset class, as more and mores institutions see alternative assets as forming part of their core investment programs

In the course of 2006 it is expected that about 18 000 commitments will occur, totaling around $ 300 billion.


Who are they?:

Eleven categories of LP's can be distinguished, with each specific investment focus.

  1. Fund of Funds: largest single of investors in private equity worldwide (230 institutions with an aggregate allocation of approximately $ 500 billion).
    They tend to more easily support first-time fund managers.
    They have easy access to "top performing" funds.
    Fund of funds are instrumental in terms of the development of the asset class in new areas such as emerging markets in Asia and elsewhere.
  2. Public Pension Funds: second largest group of limited partners (340 institutions with an estimate $ 260 billion allocated to private equity).
    This group of LP's can be defined as the world's most sophisticated and longstanding private equity investors who have supported the long term development of the industry, and have the ability to create waves in the asset class.
    Even if their strategies are evolving continuously, two fundamental trends happen:
       a. Many public pension plan are entering private equity for the first time, while existing investors are raising their allocation
       b. Large existing investors are streamlining their private equity programs, focusing more resources on fewer GP's.
  3. Corporate Pension Plans: remain an important force in private equity (390 corporate plans with an estimate $ 105 billion to private equity).
    There must be long term question marks over the whole corporate defined benefit arena.
  4. Private Equity Firms: are often overlooked.
    Many of these firms make commitments as LP's to funds raised by other GP's, often as a mean to gain exposure to geographic or industry areas of interest outside their own areas of expertise and a way of establishing relationships with other firms.
    Roughly 220 private equity firms have invested in that way.
  5. Insurance Companies: The nature of their business and investment objectives tends to make them among the more conservative LP's. (200 insurance company LP's with an estimated allocation of $ 70 billion).
  6. Banks and Investments Banks: are important players in the industry, both as sponsors of their own private equity operations, and as LP's in the funds of other firms.
    Naturally they are important providers of debt finance. (about 65 banks)
  7. Asset Managers, Investment Companies and Investment Trusts: important providers of capital (378 with an aggregate allocations of $ 95 billion).
  8. Endowment Plans, Foundations and Family Offices: are the most numerous grouping with about 780 institutions with an aggregate allocation of around $ 70 billion.
    It's quite an estimate as there are so many small investors in this category.
  9. Government Agencies: are important players especially in emerging markets where both local and international governmental bodies invest to support economic development objectives (80 government agency LP's with an aggregate $ 26 billion)
  10. Corporate Investors: are less important than they used to be, as more corporate are focusing on their core business. Nevertheless 200 corporate investors have allocated a combined $ 25 billion to private equity fund investments.
  11. Secondary Fund of Funds: a growing force in the industry and will continue to expand as new and existing LP's seek greater liquidity for their private equity programs. There are about 10 specialist secondaries fund of funds having a combined $ 23 billion.

New LP's are continually entering the asset class, as more and mores institutions see alternative assets as forming part of their core investment programs.
It is noticeable to see the growth of large investors that are looking to make their first investments and who have the potential to become major suppliers of capital.

Sources : Thompson Economics, PWC, PEI, Deloitte  
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The Dynamics of the Limited Partners…



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