In some instances, fund managers have had a great run with “super-sized” returns that might be hard to match, and in other cases managers just see less opportunity, says Peter Martenson, partner and head of global distribution at Eaton Partners, a placement agent firm.
“We certainly are seeing [firms] saying, ‘We want to be honest with you,’” he says. “It’s a very delicate discussion. These are fund managers trying to keep a relationship. It’s like a marriage. Some things are said and some things are known but not said.”
Some limited partners already know that returns are likely to be lower, but actually speaking about it still can be difficult, Martenson says.
“It’s an open secret that [the private equity market is] more competitive and that return profiles are going to be compressed,” he says. “But to say it out in the open reinforces it. And sometimes you’re rewarded for being honest and forthright, and sometimes you’re pounded.”
In some cases, the conversation is not prompted by proactive managers, but instead by questions from consultants and investors, Martenson says. “They’re quizzing about the opportunity set, market conditions, return profiles,” he says. Most of the discussions will turn to the reasons for the lowered expectations – and these can go in many directions.
Yet another rationale in the background is the sense that private equity as an asset class has begun to “mature” and that high-flying returns of decades past may be harder to attain for all but the best managers – or for particular sectors focused on growth, such as venture capital, or on distressed opportunities, such as mining and minerals, Martenson says.
“Private equity is much more mainstream and competitive, and outsized returns are more muted,” he says. “Private equity is about finding inefficiencies, and managers are good at that. But these pockets that can dramatically outperform are becoming harder to find.”
Fund managers are trying various approaches to communicate these messages to their investors, Martenson says. For some, “it’s a subtle discussion on how to lay it out,” often in a conversation with investors, he says.
“But some investors said, ‘Whoa,’” Martenson says. “Setting those lower expectations in ink may have made it harder than it would have been, but they went ahead and walked people through why there was a lower return profile.”
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