Liquidity in Private Equity Funds: Are LPs and GPs Aligned?

Executive summary

17Capital’s survey on Liquidity in Private Equity Funds explores the views of more than 50 Limited Partners (LPs) and General Partners (GPs) in Europe and North America.

Key findings:

• Dissatisfaction with liquidity pace from mature funds
• Majority of LPs believe their liquidity needs are not met by the secondary market
• Majority of LPs currently use or would consider alternative liquidity options
• Fewer GPs offer liquidity service to their investors

LP-GP misalignment on liquidity pace from mature funds

Over two thirds of mature funds (2007-09 vintages) have not returned paid-in capital to investors, according to data from Preqin, a provider of intelligence on alternative assets.

LPs and GPs have strikingly different views on the pace of liquidity from their mature funds: 60% of LPs vs 21% of GPs express dissatisfaction.

Jas Sidhu, West Midlands Pension Fund:

“We have had an excellent ‘sellers’ market’ for the last 4-5 years and mature funds have not been able to return capital. Is this because GPs were too slow to deploy capital post-crisis or are they really bad at exiting? GPs should have distributed much more back to LPs.”

Majority of LPs’ liquidity needs not met by the secondary market

More than 60% of LPs believe the secondary market does not meet their liquidity needs; 69% feel it is burdensome to sell on the market.

Alessandro Tappi, European Investment Fund:

“A secondary sale requires long preparation and is not yet a safe bet when looking for liquidity.”

UK Public Pension Fund:

“The use of the secondary market is burdensome on LPs and is not sufficient as a sole means to provide liquidity. Alternative liquidity products are a beneficial development in the industry.”

Majority of LPs would consider alternative liquidity options

Two thirds (67%) of LPs currently use or would consider using alternative liquidity options to a secondary sale, such as preferred equity or debt tranches.

Mid-market European GP:

“It is a matter of when, not if, liquidity options become market standard.”

Mid-market UK GP:

“[The findings] suggest that other tools to manage liquidity issues are required.”

Richard Clarke-Jervoise, Stonehage Fleming:

“We see preferred equity providing a valuable role here, allowing accelerated cash-returns to LPs without the need for a secondary sale at a discount.”

Few GPs offer liquidity service to their investors

Only 1 in 5 GPs offer a liquidity service to their investors. The majority of GPs feel it is not a necessary service.

Mid-market European GP:

“GPs with a longer term perspective recognise that offering liquidity options will become a permanent feature of the market in future. Optimising investors’ liquidity, particularly in advance of a new fundraising, should become part of the GP’s toolbox.”

About 17Capital

17Capital is a leading global private equity specialist focused on financing successful investors in private equity. Having pioneered and brought its offering to the market a decade ago, 17Capital has provided €1.3bn of capital to-date to investors and fund managers across 40 investments.

With 25 professionals in London and New York, 17Capital continues to innovate and lead the market as the only dedicated provider of flexible financing with a global reach. The firm manages €2.0bn of assets raised from institutional investors across four successive funds.

17Capital’s offering includes:

• Liquidity services for investors and fund managers to accelerate distributions, enabling them to retain exposure to the portfolio and preserve upside
• Capital raises for investors and fund managers to make further investments and maximise their portfolio value creation

Research methodology

Fieldwork for the survey was undertaken for 17Capital by Equus Group, a specialist capital markets communications firm with a 13-year track record in private equity research and analysis.