A Glimpse Into Limited Partners’ 2023 Allocation Plans

A majority of LPs are planning to increase their allocation to private equity, according to data from the 2023 SS&C Intralinks LP Survey. However, in Intralinks’ annual survey of 200 global limited partners, 47 percent of investors surveyed expect a rise of less than five percent. In addition, nearly 30 percent are set on a rise in the five to nine percent range.

Furthermore, only seven percent of LPs surveyed are committed to raising their exposure by 20 percent or more in the next 12 months.

Reputation of less importance

When considering the factors which sway an LP’s investment decisions, the alignment of interests between general partners (GPs) and LPs outranks a GP’s reputation. A GP’s leadership also doesn’t hold as much influence over investment selection as some may believe. Nor does a firm’s approach to environmental, social and corporate governance (ESG) and diversity, equity and inclusion (DEI).

Lower interest in sustainable investments is also echoed in LPs’ appetite for impact funds. About a quarter (24 percent) of LPs surveyed are likely to increase their exposure to these types of funds. On the other hand, 38 percent do not expect to expand their holdings of impact funds and a further 38 percent are unsure.

Investors are also hesitant about the prospect of investing in GP-led secondaries or continuation funds, where a private equity firm or sponsor sells one or more of its portfolio companies to a new fund it manages. The survey finds these funds are resulting in mixed feelings among institutional investors. The majority are either undecided (44 percent) or outrightly refuse (27 percent) to roll over their investment or buy into a continuation fund if offered the opportunity.

The amount of capital raised by GP-led secondaries funds has doubled in recent years from USD 27 billion in 2019 to USD 65 billion in 2021, according to Raymond James’ Cebile Capital, a leading private equity placement agent and secondary market advisor. Regulatory scrutiny could be causing reluctance by some investors.

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler is reportedly scrutinizing continuation funds as part of his larger review of the private equity industry’s transparency. According to Thomson Reuters, the SEC is planning to finalize 24 proposed rules by the spring of 2023.

Concerns include whether valuations in the private market will be fairly priced if a GP is acting as both the buyer and seller. Gensler has also expressed concern that certain LPs have been gaining an unfair advantage over others when it comes to co-investment deals. It might not be long before the same is questioned over continuation fund deals.

Skittish investors

The 2023 LP Survey data indicates LPs are somewhat reluctant to make more significant commitments to private equity, though their interest persists given the return potential and diversification benefits. This indicates that although the asset class has enjoyed meaningful success, the challenging capital raising environment of 2022 continues to impact investors’ sentiment as market and economic uncertainty remains a reality.