What is the way forward in European private markets?

Investor demand for private assets in Europe is set to keep rising, but so too is competition. What is the way forward?

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Key Implications

  • For 58% of the managers surveyed by Cerulli, expanding the regions under consideration is the preferred way to expand deal flow and improve capital deployment.

  • Around one-quarter of the large institutional investors surveyed by Cerulli plan to increase their allocations to mid-market buyout funds, growth funds, and distressed debt during 2020.

  • Wide private equity funds performance dispersion will continue to increase the pressure on managers that deliver below-median internal rates of return (IRR) to reduce management fees, with contract clauses that favor limited partners (LPs).

Capitalize on Private Asset Growth

European managers of private equity and debt saw their assets under management (AUM) reach significant highs last year. In June 2019, private equity AUM stood at €717 billion (US$815 billion) and private debt reached €162 billion, according to Preqin. Fundraising momentum has passed its peak for private equity, but European private debt managers had a record-breaking year in 2019.  Although the market environment remains favorable, managers are accumulating assets for the expected downturn.

The increasing size of private equity funds is leading GPs to increase either the number of deals per fund or the size of deals. This can lead GPs to exhibit diminishing deal selectivity and creates a risk of expertise drift. LPs need to monitor GPs’ deal teams relative to fund size. These concerns will be compounded by the growing dry powder and rising deal volume in the industry. Potential metrics can include the number of unrealized companies per investment team member and the growth in the investment team relative to that of the fund. Particularly, LPs should pay attention to managers that increase the size of successive funds at a faster rate than AUM for the asset class.





Cerulli expects the market environment to become more challenging for private equity managers, especially those that fail to deliver above-median returns. Although they have so far benefited from stable pricing power and favorable contract terms, we expect intensifying competition, a downturn in the business cycle, and greater focus on industry practices to increase the pressure on managers.

Intensifying competition and increasing dry powder in the industry mean that GPs need to diversify their deal-sourcing capabilities. For 58% of the managers surveyed by Cerulli, expanding the regions under consideration is the preferred way to expand deal flow and improve capital deployment. Additionally, managers should explore technology, especially machine learning, to source deals, improve due diligence, and support operational improvements for portfolio companies.

General Partners: Approaches Currently Used for Capital Deployment and Deal Sourcing and Planned Changes Over the Next 24 Months, 2019
Sources: Cerulli Associates, The Cerulli Report—European Alternative Investments 2020: Matching Different Demands
Analyst Note: One manager stated that it will introduce internal deal origination over the next 24 months.


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  • Institutional investor demand for private investmentsAround one-quarter of the large institutional investors surveyed by Cerulli plan to increase their allocations to mid-market buyout funds, growth funds, and distressed debt during 2020. Nearly half of smaller investors—those with assets of less than €15 billion (US$17 billion)—plan to boost their allocation to mid-market buyout funds and distressed debt strategies.

  • Fee pressure and the alignment of interest between LPs and GPs—Wide private equity funds performance dispersion will continue to increase the pressure on managers that deliver below-median internal rates of return (IRR) to reduce management fees, with contract clauses that favor limited partners (LPs). Favorable LP contract clauses will include capping administrative expenses and charging management fees on invested capital. However, we believe that the most sought-after managers, those delivering top-quartile returns, will continue to dictate fund terms.

  • Private banks’ allocations to private investments—Private banks’ average recommended strategic allocation to private equity is 10.9%, yet more than 30% of family offices typically allocate more than 15% to the asset class. High-net-worth (HNW) and ultra-HNW individuals typically have slightly lower allocations to private equity than family offices. Cerulli believes GPs that can offer co-investments, knowledge sharing, and, increasingly, environmental, social, and governance (ESG) capabilities can improve their competitiveness with family offices.

  • Private investments structures for retail investors—Managers are placing more emphasis on attracting retail clients further down the wealth curve, which is expected to lead to greater allocations. The European long-term investment fund (ELTIF) structure has been slow to garner interest, but the recent rise in notable fund launches focused on private markets indicates that managers are increasingly seeing the structure as a way to package illiquid strategies for retail investors.

  • Private banks’ use of existing GP relationships—Only 22% of the private banks we surveyed plan to use mainly new GP relationships when allocating to private equity. Almost half of respondents plan to rely on both existing and new GP relationships over the next 12 months. 

  • Importance of responsible investment in private investments—79% of the European institutional investors Cerulli surveyed believe that in two years’ time it will be “very important” to integrate responsible investments (RI) into private equity. Cerulli believes the growing interest in and adoption of RI, together with a greater focus on generating value creation through operational improvements, will help GPs in their fundraising endeavors and meet return targets.
Institutional Asset Owners: Preferred Fee Structures When Investing in Private Equity, 2019

Source: Cerulli Associates, The Cerulli Report—European Alternative Investments 2020: Matching Different Demands


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