LPEQ is grateful to Professors Cumming, Fleming and Johan for their insights and multivariate analyses resulting in this seminal academic paper on listed private equity. It is based on survey data commissioned by LPEQ and undertaken by Preqin of 100 institutional investors in Europe. We include the summary below and encourage you to follow the SSRN link to read the full paper.
Institutional Investment in Listed Private Equity, by Douglas J. Cumming, Grant A. Fleming and Sofia A. Johan, is available at SSRN: http://ssrn.com/abstract=1541502
An increasing number of private equity management firms and funds (and fund-of-funds) are employing an alternative method of raising capital by listing on public exchanges. Private equity has traditionally been offered to institutional investors through private placements as this is seen as an efficient structure through which funding can be obtained from a specific type of investor with corresponding investment goals, more quickly and more cheaply, while taking advantage of exemptions from registration with relevant securities regulators. Listed private equity funds provide both institutional and retail equity investors an opportunity to (potentially) achieve the types of returns usually reserved for larger institutions in the private market. In addition, as the size and range of listed private equity offerings has grown, institutional investors have had access to an alternative (or sometimes complementary) investment opportunity which provides, all things being equal, improved liquidity and lower transaction costs to private equity returns. Institutions can invest in both listed and limited partnership private equity and can dynamically adjust exposure to listed private equity over time as their limited partnerships draw down commitments. To date, however, there is no evidence on the extent to which institutional investors utilize listed private equity in their investment portfolios, and if so for what reasons.
This paper provides the first analysis of the use of listed private equity by institutional investors. Our data is derived from a 2008 survey of 100 institutional investors in Europe, completed by LPEQ, the European listed private equity trade body, and Preqin, a leading source of information for the alternative assets industry. The data comprise unique details about institutional investors’ allocations into listed private equity, as well as demographic characteristics such as size, type of investor, location, decision-making authority and liquidity preference. The average institutional investor in the sample manages over €57.7 billion, with the median at €4.8 billion. We hypothesize three motivations of institutions to invest in listed private equity based on search costs (the size, investor type, and location may influence the resources available to an institution in identifying, making and monitoring private equity investments), specific human capital (the structure and make-up of the investment decision making team that implements allocation mandates) and liquidity-time preferences (desire to achieve full exposure to private equity as soon as possible to meet allocation and investment mandates).
Our results show that listed private equity is more commonly used among institutions that are smaller, private (not public) pension institutions, institutions that have a preference for liquidity, and institutions that are based in the UK. We find that a change in institutional size from €5 billion to €10 billion reduces the amount invested in listed private equity relative to total equity by 0.5%. As well, institutions are more likely to invest in listed private equity when investment decision making is not empowered to a private equity team, an alternative asset class team, or a board/investment committee, but are more likely when decision-making is delegated to an equities team. We also find that institutions that use listed private equity are also approximately 9% closer to meeting their allocation mandates.
In the decision making process, it is worth noting that consultants are often used in selecting private equity funds (i.e., an ‘external’ influence on internal decision making). Consultants tend to restrict their advice on unlisted funds to manager/general partner selection and partnership terms. In many cases the same manager/general partner will offer a listed vehicle which might suit clients who seek greater liquidity or a smaller minimum commitment. This may become increasingly the case as defined benefit schemes, which are able to make sizeable long term commitments, are replaced by defined contribution schemes for which investment in illiquid alternative assets is more problematic, unless listed vehicles are used. Consultants have reported to LPEQ that choosing a listed private equity vehicle involves an element of “stock selection” rather than solely “manager selection”. It seems that consultants rarely provide information on listed private equity, although evidence from the LPEQ survey indicates many of their clients wish for more information on listed private equity.
Overall, the empirical findings based on statistical tests and regression models are consistent with the hypotheses that institutions invest in listed private equity in order to reduce search costs associated with the asset class, and improve their ability to achieve a desired investment exposure in as timely a manner as possible. This is particularly interesting as the institutions may have finally found a way to invest the full amount of their current allocation to the private equity asset class by adjusting their listed private equity allocation (up or down) over time as, for example, draw downs increase amongst their limited partnership private equity allocations. We believe that the findings of this research will not only assist the listed private equity firms, funds and funds-of-funds in understanding the composition and motivations of their investors, but may also assist other firms and funds who are contemplating a listing in their marketing efforts.
This draft: January 18, 2010
The full text of this paper can be downloaded without charge from
http://ssrn.com/abstract=1541502
We owe thanks to Andrea Lowe and LPEQ http://www.LPEQ.com , for data, helpful comments and support. This paper is scheduled for presentation at the European Financial Management Association Conference on Entrepreneurial Finance at CIRANO, Montreal. Address for correspondence:
Douglas Cumming, Associate Professor and Ontario Research Chair, York University - Schulich School of Business, 4700 Keele Street, Toronto, Ontario M3J 1P3, Canada, http://ssrn.com/author=75390, Douglas.Cumming@gmail.com
Grant Fleming, Wilshire Private Markets, Level 4, East Tower, Otemachi First Square, Otemachi, Chiyoda-ku, Tokyo 100-0004, Japan, Email: grant.fleming@wilshire.com, and Visiting Fellow, School of Finance and Applied Statistics, College of Business and Economics, Australian National University, Canberra, ACT 0200, Australia
Sofia A. Johan, TILEC/AFM Senior Research Fellow, Tilburg Law and Economics Center, Postbus 90153, 5000 LE Tilburg, The Netherlands, Email: sofiajohan@email.com
