Preqin Investor Outlook: Alternative Assets H2 2013

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1 Preqin Investor Outlook: Alternative Assets H Private Equity Hedge Funds Real Estate Infrastructure alternative assets. intelligent data.

2 Contents Foreword... 2 Section One: Alternative Assets Overview of Investor Attitudes to Alternative Assets in H Alignment of Interests and Impact of Regulatory Changes... 5 Section Two: Private Equity Introduction... 7 Investor Activity in Satisfaction with Returns... 9 Key Issues and Regulation Investor Activity in the Coming Year and the Longer Term Strategies and Geographies Targeted Attracting LP Capital and Due Diligence Alternative Methods of Accessing the Asset Class Fees and Alignment of Interests Section Three: Hedge Funds Introduction Key Issues and Regulation Fund Searches Overview What Are Investors Looking for in a Hedge Fund Manager? Satisfaction with Returns Fees and Alignment of Interests Direct Hedge Funds vs. Funds of Hedge Funds: In Focus Section Four: Real Estate Introduction Investor Activity in the Last 12 Months Investor Activity in the Coming 12 Months Capital Outlay Strategies and Geographies Targeted s and Confi dence in the Asset Class Fees and Alignment of Interests Key Issues and Regulation Alternative Methods of Accessing the Asset Class Section Five: Infrastructure Introduction Investor Activity in the Coming Year and the Longer Term Future Searches and Capital Outlay Satisfaction with Returns Manager Selection and Key Issues Facing the Industry Fees and Alignment of Interests Impact of Regulation Datapack for Preqin Investor Outlook: Alternative Assets, H The data behind all of the charts featured in the report is available for free in an easily accessible datapack. It also includes ready-made charts that can be used for presentations, marketing materials and company reports. To download the datapack, please visit: All rights reserved. The entire contents of Preqin Investor Outlook: Alternative Assets, H are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Investor Outlook: Alternative Assets, H is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent fi nancial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Investor Outlook: Alternative Assets, H While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confi rm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Investor Outlook: Alternative Assets, H are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Investor Outlook: Alternative Assets, H or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication. 1

3 Preqin Investor Outlook: Alternative Assets, H Foreword Welcome to Preqin Investor Outlook: Alternative Assets, H2 2013, a unique look at institutional investors in private equity, hedge funds, real estate and infrastructure. This study is based on the results of a series of extensive interviews with 450 investors in alternatives assets carried out between June and August These investors, broken down by location and type below, were sourced from Preqin s industry-leading online products, which feature extensive profiles for over 7,800 institutions actively investing in alternatives. For the first time, we compare the attitudes of investors across alternative assets, examining appetite for the coming year, plans for allocations, opinions on fund terms, and the impact of new regulation. We also look at each asset class in detail to offer invaluable insight into investor intentions for the coming year and in the long term. Our interviews revealed that there is still huge potential for the alternative assets industry to grow. Sixty-four percent of investors invest in just one or two alternative asset classes, leaving potential for new allocations to be created, many investors are below their target allocations to alternative assets, and a significant proportion expect to increase these allocations in the longer term. Fundraising remains extremely challenging, however, with more than 12,000 private equity, real estate, infrastructure and hedge funds currently being marketed. For managers seeking institutional capital, standing out from the crowd is harder than ever. For investors, identifying the right opportunity in an increasingly crowded market place has never been so difficult. This is why we created Preqin Investor Network, a platform that provides free access for investors to details of all alternative asset funds open to investment, as well as other tools to assist in asset allocation, fund selection and due diligence. 4,400 investment professionals across 2,800 accredited institutional investors subscribe to Preqin Investor Network; these investors have a combined $40tn in assets under management. Visit to see how your firm is being displayed to Preqin s investor clients, and to make sure that they have all the available information on your firm. We hope that you find this report to be interesting and useful, and as ever we welcome any feedback or suggestions that you may have for future editions. To find out more about our products and services, please do not hesitate to contact us at info@preqin.com or our New York, London, Singapore, or San Francisco offices. Breakdown of Respondents Breakdown of Respondents by Investor Location Breakdown of Respondents by Investor Type Public Pension Fund 4 9% 9% 42% Europe North America Asia Rest of World 2% 2% 1 4% 7% 9% 19% 13% 14% Insurance Company Private Sector Pension Fund Asset Manager Foundation Endowment Plan Bank & Investment Bank Family Office Superannuation Scheme Government Agency Other Source: Preqin Source: Preqin Are you an investor? Join Preqin Investor Network to get free access to details of all alternative assets funds in market, key contact details and fund manager performance track records. Are you a fund manager? Make sure investors can fi nd you. Contact us to view your fi rm or fund profi le, make sure the information is up to date, and provide us with valuable feedback. 2

4 1. Alternative Assets Overview of Investor Attitudes to Alternative Assets in H Although there are significant variations between asset classes, the overall outlook for investors in alternative assets is positive, with the majority looking to either maintain or increase their capital commitments in the next 12 months and the longer term, and investor satisfaction with returns high. The prominence of alternative assets in institutional investors portfolios has grown considerably in recent years, with the returns and diversification provided by alternatives offering a compelling option to institutions looking to meet their overall portfolio return expectations. Fig. 1.1 shows the number of alternative asset classes (either hedge funds, private equity, private real estate or infrastructure) that each of the 7,800 active investors tracked by Preqin commit to. The largest proportion of investors (38%) commit to just one alternative asset class, with just 11% of institutions investing in all four. The wider trend for investors is to create larger and more complex portfolios of alternative investments by increasing allocations to strategies they already have exposure to, as well as diversifying into new strategies. With such a large proportion of investors only committing to one or two alternative asset classes, there is potential for significant growth in all four alternative asset classes. Investor s guidelines. In comparison, 5 of investors in private equity target allocations of 7. or more of their assets under management to the asset class. Investors in hedge funds are much more likely to have higher allocations to the asset class, with 42% targeting an allocation of at least 1, and 6% targeting an exposure to hedge funds of 3 or more of their total assets under management. Fig. 1.3 demonstrates that the majority of both real estate and infrastructure investors are below their target allocations to the asset class, at 54% and 59% respectively, with 4 of private equity and 41% of hedge fund investors also under-allocated. This is encouraging for fund managers in all alternative asset classes, with a significant proportion of investors likely to have Fig. 1.1: Breakdown of Investors by Number of Alternative Asset Classes Represented Within An Institutional Portfolio (Investors with Exposure to at Least One Alternative Asset Class) Section One: Alternative Assets When looking at the breakdown of private equity, real estate, infrastructure and hedge fund investors with an active allocation to the relevant asset class, there is significant variation in the allocations targeted. For instance, 81% of investors with an active infrastructure portfolio have target allocations to the asset class of less than 7. of their total assets, a much higher proportion than investors in other alternative asset classes (Fig. 1.2). Infrastructure is a relatively newly-established asset class, and many institutions are still in the early stages of establishing separate allocations to the asset class. Additionally, a significant proportion of infrastructure investors invest opportunistically in the asset class and therefore do not operate under set allocation 2 11% 26% 38% Exposure to One Alternative Asset Class Exposure to Two Alternative Asset Classes Exposure to Three Alternative Asset Classes Exposure to All Four Alternative Asset Classes Fig. 1.2: Breakdown of Alternative Assets Investors Target s by Asset Class (Investors With an Active to the Asset Class) Source: Preqin Fig. 1.3: Breakdown of Alternatives Investors that Are At, Above or Below Their Target s by Asset Class % 16% 6% 2% 1% 3% 13% 16% % 14% 18% 13% Proportion of Investors % 5 36% 24% 33% % 3 or More % % Less than 7. Proportion of Investors % % 27% 54% 28% 59% Above Target At Target Below Target Private Equity Hedge Funds Real Estate Infrastructure Source: Preqin Private Equity Hedge Funds Real Estate Infrastructure Source: Preqin 3

5 Preqin Investor Outlook: Alternative Assets, H capital available for further commitments. Twenty-four percent of investors in private equity are over-allocated to the asset class, a larger proportion than are above their allocations to hedge funds, real estate or infrastructure. Satisfaction with Returns Investor satisfaction from the returns generated by their alternative assets investments is likely to significantly impact the amount of capital they will commit in the future and may influence future changes to their allocations. Encouragingly, Fig. 1.4 reveals that the vast majority of all investors across private equity, hedge funds, real estate and infrastructure feel that the performance of their investments has either met or exceeded expectations. However, there are clear differences between asset classes, with a particularly notable 29% of infrastructure investors stating that returns have exceeded expectations, and only 7% stating that they have fallen short of expectations. In contrast, 26% of hedge fund investors and 2 of real estate investors believe that their returns have fallen short of expectations. Outlook for the Coming Year and the Longer Term While more than a quarter of investors in hedge funds were dissatisfied with the returns they had received in the past year, a large proportion of investors in hedge funds have significant allocations to the asset class, suggesting that many investors do not allocate solely to generate returns, but also because of the liquidity, diversification and volatility dampening that the asset class can provide. Although a greater proportion of investors in hedge funds plan to reduce their allocations than any other alternative asset class, investor appetite remains strong, with 88% of investors allocating the same amount or more capital in the coming year than they did in the last 12 months, and 82% maintaining or increasing their allocations to the hedge funds in the longer term. As the performance of the private equity asset class continues to improve, investor appetite for the asset class is also increasing. Eighty-six percent of investors feel performance of the asset class has met or exceeded their expectations, and correspondingly many investors are allocating more capital in the coming year. Thirty-one percent of investors are planning to commit more capital in the coming year and 34% anticipate increasing their allocations in the longer term. The infrastructure asset class has the potential to see significant growth in the coming years, with many investors interested in the diversification and long-term stable returns the asset class can provide. Sixty-three percent of investors expect to commit more capital to the asset class in the coming year than they did in the past 12 months and, while investor allocations to infrastructure are typically smaller than for other alternative asset classes, 58% of respondents expect to increase their allocations to infrastructure in the longer term. There is unlikely to be a significant increase in the amount of institutional capital flowing to real estate in the coming year. While 3 of respondents do plan to commit more capital in the next 12 months, 19% expect to commit less. In the long term however, the outlook is more positive. The majority of investors are below their targeted exposure to the asset class, and 4 expect to increase their real estate allocations. Fig. 1.5: Investors Expected Capital Commitment to Alternative Assets Funds in the Next 12 Months Compared to the Past 12 Months Fig. 1.4: Proportion of Investors that Feel Their Investments Have Lived up to Expectations Over the Past 12 Months by Asset Class % 68% 18% 26% 2 64% 6 Fig. 1.6: Investors Intentions for Their Alternative Assets s in the Longer Term 7% 64% 29% Fallen Short of Expectations Met Expectations Exceeded Expectations Private Equity Hedge Funds Real Estate Infrastructure Source: Preqin Investor Interviews, June - August % 13% 19% % 8% 2% % 59% 51% 31% 29% 3 27% 63% Less Capital in the Next 12 Months than the Last 12 Months Same in the Next 12 Months as in the Last 12 Months More Capital in the Next 12 Months than the Last 12 Months % 34% 59% 23% 52% % Decrease Maintain Increase Private Equity Hedge Funds Real Estate Infrastructure Private Equity Hedge Funds Real Estate Infrastructure Source: Preqin Investor Interviews, June - August 2013 Source: Preqin Investor Interviews, June - August

6 1. Alternative Assets Alignment of Interests and Impact of Regulatory Changes With the alignment of interests between investors and fund managers a continuing concern in the alternatives industry, we asked investors whether they had seen any positive change in this area, and whether the influx of new regulation had made any impact on their allocations to alternatives. Although fund terms and conditions remain a contentious issue across the alternative asset classes, the majority of investors in private equity, hedge funds, real estate and infrastructure do feel fund manager and investor interests are properly aligned. However, a significant 48% of infrastructure investors either disagreed or strongly disagreed that there was alignment of interests. In comparison, real estate investors appear the most satisfied with the alignment of interests between investors and fund managers, with 72% either agreeing or strongly agreeing that interests are properly aligned. The alternative assets industry has seen a large number of regulatory changes in recent years, such as the Dodd-Frank Act, Basel III, Solvency II, and the AIFMD. Opinion is divided among Fig. 1.7: Proportion of Investors that Feel Fund Managers and Investors Interests are Properly Aligned by Asset Class % 32% 63% 7% 29% 62% 4% 2% 28% 63% Source: Preqin Investor Interviews, June - August 2013 Fig. 1.9: Investors Views on Whether Regulations Introduced in 2011, 2012 and 2013 Are Beneficial to the Alternative Assets Industry by Asset Class 9% 44% 47% Private Equity Hedge Funds Real Estate Infrastructure 4% 4% Strongly Disagree Disagree Agree Strongly Agree investors as to whether the recent regulations are beneficial to the industry or not. Private equity investors most strongly believe that they are not, with 41% of respondents stating so, and only 19% believing that they are beneficial to the industry. In comparison, 3 of hedge fund investors view recent regulations as beneficial to the industry, whereas the majority of both real estate and infrastructure investors are unsure of the impact of recent changes. What is clear however, is that the vast majority of investors do not expect new regulations to impact their allocations to alternatives (Fig. 1.10). While private equity investors are most likely to reduce their exposure as a result of recent regulatory changes, with 19% having already reduced their allocations or planning to do so, most do not expect any changes to their allocations. Fig. 1.8: Investors Views on Whether There Has Been a Change in Fund Terms in the Past 12 Months by Asset Class % 5 42% 54% 42% 61% 2 3% Private Equity Hedge Funds Real Estate Infrastructure Source: Preqin Investor Interviews, June - August 2013 Fig. 1.10: Impact of Recent Regulatory Changes and Proposals on Investors Alternative Assets s 2% 3 64% Significant Change in Favour of Fund Manager Slight Change in Favour of Fund Manager No Change Slight Change in Favour of Investor Significant Change in Favour of Investor % 41% % 43% 22% 26% 52% 18% 16% 67% Regulations Are Beneficial to the Industry Regulations Are Not Beneficial to the Industry Unsure % 8% 78% 3% 2% 94% 4% 9% 92% 8 Have Reduced May Reduce in the Future No Change May Increase in the Future Have Increased Private Equity Hedge Funds Real Estate Infrastructure 4% 1% 1% 7% 2% 2% 3% Private Equity Hedge Funds Real Estate Infrastructure Source: Preqin Investor Interviews, June - August 2013 Source: Preqin Investor Interviews, June - August

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8 2. Private Equity Private Equity Continued Confidence in Private Equity Section Two: Private Equity Conducting interviews with private equity investors based around the globe revealed a wealth of valuable information with regard to investor sentiment towards their private equity commitments in the past, present and future. The results paint an interesting picture, highlighting investors intentions with regard to allocations, the issues in the industry that they are concerned with today, key strategies and regions they are targeting, and more. Investor appetite for private equity over 2013 so far has been healthy and is set to continue. As of the end of June 2013, 57% of LPs Preqin interviewed had already made new commitments to funds in 2013 so far, which is a marked increase from the corresponding figure from June 2012, when only 47% of investors at the time had done so. There is some degree of geographic disparity with regard to levels of investor activity, with a notably higher proportion of investors based in Asia and other regions outside of North America and Europe having made commitments in H1 2013, compared to investors based in North America and Europe. AIFMD, Solvency II, Basel III and Dodd-Frank Act will all have a significant impact on the private equity industry in the years to come. Regulation was highlighted as the most prominent challenge facing investors seeking to operate an effective private equity program by LPs interviewed by Preqin. However, the recent regulatory changes and proposals are yet to fully move the investor community to alter their investment activities, with only 11% of investors interviewed having reduced their allocation to private equity already and 78% admitting there has been no change in their allocation due to regulatory changes yet. Nonetheless, it is clear that private equity investment is still attractive to LPs, with 92% of investors interviewed intending to maintain or increase their allocation. Furthermore, investors are actively looking to access the asset class through a diverse range of methods. In particular, Preqin s interviews with investors reveal a growing interest in private debt (page 12). The emergence of this space adds to an exciting layer to a dynamic private equity landscape, along with all others, for investors to contemplate. This past year has seen the announcement of a number of regulatory changes that will affect the private equity industry and the players in it, particularly in North America and Europe. The Key Facts 57% of investors had made private equity investments already in 2013, compared to 47% at the same time in % of investors interviewed intend to maintain their allocation to private equity both in the next 12 months. 86% of investors feel that their private equity investments have met or exceeded their expectations. 52% of investors named mid-market buyout funds as the fund type that is presenting the best opportunities at present. 31% of investors named regulation as the biggest challenge currently facing LPs seeking to operate an effective private equity program. 44% of investors interviewed intend to increase the number of GP relationships in their portfolios over the next two years. 7

9 Preqin Investor Outlook: Alternative Assets, H Investor Activity in 2013 As the fundraising environment for private equity shows clear signs of improvement, with an increase in aggregate capital secured by private equity funds, exploring the intentions and operations of investors over 2013 is highly valuable in gaining insight into current and potential market activity. In H1 2013, a total of 381 private equity funds reached a final close, garnering an aggregate $218bn. This is the highest halfyear fundraising value for almost five years, when $299bn was raised by funds closed in H A further 282 funds held at least one interim close in H securing an aggregate $52bn towards their targeted capital. These figures demonstrate the success GPs have had in securing LP commitments, and also the healthy investor appetite that exists. Preqin interviewed over 100 institutional investors in private equity in June 2013 to assess their current attitudes towards the private equity asset class and also to gain an insight into their investment activity so far in 2013 and their intentions for the future. Fifty-seven percent of respondents had made commitments already in 2013, compared to 47% of LPs interviewed at the same time in 2012, as shown in Fig The increase in the proportion of investors making new commitments since the hesitation seen in June 2012 is reflected in the improvement in fundraising statistics over the same time period. investing for the time being as they for a number of regulatory changes to become clear before reviewing their allocations to the private equity class. For example, Solvency II places a relatively high capital requirement for private equity, which is forcing Europebased insurance companies to decrease their allocations to the illiquid asset class. Moving forwards, Fig. 2.3 illustrates that 4 of investors interviewed are below their target allocations to private equity, 48% are at their target and 12% are above their desired allocation. This suggests that 88% of investors are likely to continue to make new commitments to private equity funds in the near future in order to maintain or build towards their target allocations to the asset class. Fig. 2.1: Proportion of Investors that Made New Private Equity Fund Commitments in H1, June June A geographic breakdown of where these private equity commitments emanate from reveals high levels of activity in some regions compared to others. Asia stands out as the most active region for investors, with 86% of LPs interviewed that were based in the region having already made commitments in H (Fig. 2.2). Investors based in regions outside of North America, Europe and Asia are also very active, with over three-quarters (76%) of LPs based in these regions having made new investments in the first half of The corresponding statistics for Europe provide a significant contrast, with only 47% of European investors indicating that they have made commitments in H Europebased LPs may be more cautious, with some deterred from % 41% 46% 54% 36% 64% 53% 47% 43% 57% Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Did Not Make New Commitments in H1 Made New Commitments in H1 Source: Preqin Investor Interviews, June June 2013 Fig. 2.2: Proportion of Investors that Made New Private Equity Fund Commitments in H by Location Fig. 2.3: Proportion of Investors At, Above, or Below Their Target s to Private Equity % 24% % 47% 86% 76% Did Not Make New Commitments in H Made New Commitments in H % 48% Above Target At Target Below Target North America Europe Asia Rest of World Source: Preqin Investor Interviews, June 2013 Source: Preqin Investor Interviews, June

10 2. Private Equity Satisfaction with Returns Preqin s recent interviews with private equity investors reveal that the greatest proportion of investors are now having the performance of their private equity portfolios either meet or exceed their expectations compared to previous years. Our interviews determined their levels of satisfaction with regard to fund returns and their returns expectations in comparison to the public market. A fairly consistent proportion of investors over the years 2010 to 2013 have felt that their private equity fund investments have met their expectations; this figure has fluctuated between 68% and 7 over the past four years, as shown in Fig However, the proportion of investors that believe that their private equity fund investments have exceeded their expectations has reached its highest level yet at 18%, an increase from June 2012 when just 9% of LPs had the same sentiment. This indicates that a greater proportion of investors overall are having their expectations of the asset class surpassed, which would be in line with improved fund performance and a healthy rate of recovery in the financial markets. Subsequently, a smaller proportion of LPs now feel that their private equity fund investments have fallen short of expectations at 14% compared to June 2012, when 21% of LPs stated their private equity investments had not lived up to expectations. Just under half (49%) of LPs interviewed by Preqin in June 2013 expect returns from their private equity investments in excess of 400 basis points over public markets, as shown in Fig This is a notable decline from the corresponding statistics from previous years, especially in June 2011 when 7 of investors expected their private equity portfolios to have returns of +4.1% or more compared to public markets. Just over a third (34%) of LPs interviewed by Preqin in June 2013 were expecting returns of between +2.1% and +4% above public markets, with a further 1 expecting returns of +2% above public markets. While overall it appears that LP expectations for their private equity portfolios have fallen, it is important to recognize that public markets have seen a continued improvement in performance more recently, which may partly explain the lower return expectations among LPs for their private equity portfolios in comparison to public markets. Fig. 2.4: Proportion of Investors that Feel Their Private Equity Fund Investments Have Lived up to Expectations, June June 2013 Fig. 2.5: Investors Returns Expectations for Their Private Equity Portfolios, June June % 19% 21% 14% % 7 68% Fallen Short of Expectations Met Expectations Exceeded Expectations % 36% 7 64% 23% 49% 34% Public Market +4.1% and Over Public Market +2.1 to +4% Public Market +2% Same as Public Market 18% 13% 9% 9% Jun-10 Jun-11 Jun-12 Jun % 11% 1% 1% 2% Jun-10 Jun-11 Jun-12 Jun-13 Source: Preqin Investor Interviews, June June 2013 Source: Preqin Investor Interviews, June June 2013 Looking for detailed information on private equity investors? Preqin can help. Preqin s Investor Intelligence is the industry s leading source of information on institutional investors in private equity funds. This constantly updated online resource includes detailed profiles for over 5,100 active investors in private equity and over 1,300 investors that have placed their investments on hold. Profiles include information on future fund searches and open mandates, funds and firms previously invested in, co-investment strategies, investment consultants, and much more, and are constantly updated by our dedicated team of multi-lingual analysts. For more information, or to arrange a demonstration, please visit: 9

11 Preqin Investor Outlook: Alternative Assets, H Key Issues and Regulation 2013 is a significant year for regulatory changes that will greatly impact the private equity industry and the players within it. Investors must face the challenges of amending their operations where necessary in order to meet criteria laid down by regulations, as well as other issues that affect LP investment objectives. Regulation, performance, and the economic environment are the most common issues facing investors seeking to operate an effective private equity program at present, with each named by a significant proportion of LPs interviewed by Preqin (Fig. 2.6). Regulatory Pressures Regulations such as the Volcker Rule, Basel III and Solvency II are all coming into effect in the near future, while the Alternative Investment Fund Managers Directive (AIFMD) came into effect on 22 July All have the potential to considerably impact investors private equity portfolios. A Germany-based insurance company told us that Solvency II has been bad for the industry but it is needed for stability. It is a pressured time for many industry players to reassess their operations within the asset class in order to meet the requirements of the looming regulatory changes, if they have not done so already. Preqin s interviews revealed that 19% of LPs view these regulations as beneficial for the private equity industry, 41% said they were not beneficial, and the remaining 4 were unsure. Such uncertainty could be due to the time lag between the announcements of the regulations and the dates the laws actually come into effect; the industry has yet to see the full impact of the regulations. This is reflected in the lack of movement from investors in altering their private equity allocations. Fig. 2.7 shows that regulatory changes have not impacted the private equity allocations of the vast majority (78%) of investors. A Negative Public Perception Fig. 2.8 illustrates investor opinion of the public s perception of the private equity industry. Over half of investors (53%) feel that Fig. 2.7: Impact of Regulatory Changes and Proposals in Investors Private Equity s the public view the industry negatively compared to only 14% that believe it is positive. When asked for the reasons as to why the public s perception was negative, many LPs stated that they believe the public are not fully aware of the success stories private equity creates and the benefits it brings to the economy. Several of the investors interviewed stated a need for the industry to become more transparent and commented on the key role the media can play in raising awareness. However, a US-based endowment plan expressed that the damage to the public s perception was too severe following the last US presidential elections and questioned the ability of the industry to change this view any time soon, stating It will be a long-term change as it will take a lot to distance itself from the bad image created in the 2012 elections. Fig. 2.6: Biggest Challenges Facing Investors Seeking to Operate an Effective Private Equity Program at Present % 31% Regulation Performance of Portfolio 3 Economic Volatility Fig. 2.8: Investors Views on Public Attitudes Towards Private Equity 24% Transparency 23% Fees 18% Liquidity 16% Other Source: Preqin Investor Interviews, June % 1% 2% 11% 8% Have Reduced to Private Equity Might Reduce to Private Equity in the Future Have Not Changed to Private Equity Might Increase to Private Equity in the Future Have Increased to Private Equity 53% 7% 14% 26% Public Attitude Towards Private Equity is Positive Public Attitude Towards Private Equity is Neutral Public Attitude Towards Private Equity is Negative Unsure of Public Attitude Towards Private Equity 10 Source: Preqin Investor Interviews, June 2013 Source: Preqin Investor Interviews, June 2013

12 2. Private Equity Investor Activity in the Coming Year and the Longer Term Upheaval brought on by proposed regulatory changes, combined with a continued uncertainty as to the recovery rate of the world s financial markets, are impacting private equity investors future investment plans. We asked investors their intentions for their private equity allocations over the next 12 months, as well as the longer term. Preqin is constantly in contact with investors around the world to determine their future intentions for their investments within the private equity asset class. A number of factors, including continued uncertainty over the recovery of financial markets, impending regulations and a still somewhat challenging fundraising environment, mean investors face a difficult task in deciding how to allocate to the asset class in the coming months and the longer term. As shown in Fig. 2.9, the majority of investors interviewed by Preqin in June 2013 intend to maintain their allocation to the private equity asset class both in the next 12 months (61%) and in the longer term (51%). Over a third of investors (34%) plan to increase their allocations in the longer term, which is positive news for fund managers currently seeking capital or planning to launch new vehicles in the future. Just 8% of investors interviewed plan to reduce their allocations to private equity in the coming year, while 1 of respondents Fig. 2.9: Investors Intentions for Their Private Equity s plan to do so in the longer term, which may be reflective of their anticipation of the impact of upcoming regulations within the industry on their allocations to private equity. Existing vs. New GP Relationships With regards to making new commitments over the coming year, 17% of investors that plan to be active in the asset class in the next 12 months expect to solely re-up with existing managers in their portfolio, as shown in Fig. 2.10; the benefits of this include time and resource efficiency. Encouragingly however, the remaining 83% of investors interviewed expecting to be active in the next 12 months are either actively seeking new GP relationships or will consider doing so in the year ahead. For an investor, the past performance of a fund manager is very important when assessing which GPs to work with and those with attractive track records are likely to attract the most investors. Fig. 2.10: Investors Intentions for Forming New GP Relationships Over the Next 12 Months % 34% 17% 2% 17% Entirely Allocated To Re-Ups With Existing Managers % 51% Increase Maintain Decrease 38% 26% Mostly Re-Ups, Consider Some New GP Relationships A Mix of Re-Ups and New GP Relationships Mostly New GP Relationships 8% Next 12 Months 1 Longer Term Only Investing With New Managers Source: Preqin Investor Interviews, June 2013 Source: Preqin Investor Interviews, June 2013 Looking to source new investors for your private equity fund? Preqin tracks the future investment plans of investors in private equity, allowing subscribers to Investor Intelligence to source investors actively seeking new private equity commitments via the Fund Searches and Mandates feature. The Future Fund Searches and Mandates feature is the perfect tool to pinpoint those institutions that are seeking new private equity investments for now. Search for potential new investors by their current investment searches and mandates, including fund structure, fund strategy and regional preferences. For more information, or to register for a demonstration, please visit: 11

13 Preqin Investor Outlook: Alternative Assets, H Strategies and Geographies Targeted With such a large choice of investment opportunities in the current saturated fundraising market, investors often find it a challenge to select the best funds. We asked investors which regions and fund types are the most appealing to them and where they anticipate placing their capital in the next 12 months. Growing Interest in Private Debt Private debt is an emerging space in the investment world, carving out its own niche and becoming established as a distinct asset class in its own right. The apparent upward trend is one that has been recognized by fund managers and investors alike. Following the credit crunch and subsequent retreat of banks, the landscape for debt financing for private assets has undergone some change; new providers of debt have materialized at a time when appetite for well-structured debt finance is swelling among borrowers. Preqin s interviews with private equity investors in June 2013 revealed 47% of investors interviewed currently have an exposure to private debt, and of those that did not, a sizeable proportion (46%) stated that they would invest or consider investing in private debt in the future. The alternative assets industry is seeing more private equity players expanding their operations to include private debt and taking advantage of opportunities in a variety of credit strategies. Fund Type Preferences Buyout funds, particularly in the small to mid-market size range, were cited by the majority of investors interviewed (52%) as the fund type that is presenting the best opportunities currently (Fig. 2.11). Fourteen percent of respondents named large to mega buyout funds as currently presenting most attractive investment opportunities. Secondaries funds were named by 19% of investors as a fund type that they believe has strong investment potential at the moment. This year has seen fund manager-led secondaries transactions reach an all-time high in terms of value and number as GPs seek to provide liquidity solutions to their investors and ease the timing pressure of end of life funds. Investors benefit from secondaries investments from the shorter maturation periods and the resulting quicker returns they offer. Geographic Preferences The greatest proportion of investors interviewed named North America as currently presenting the best investment opportunities, with the smallest proportion of LPs (22%) indicating that they are avoiding this region. Over half (57%) of respondents view North America as a region currently presenting the best opportunities in the current financial climate, compared to 52% for Europe, 31% for Asia and 21% for other regions. Appetite for Emerging Markets When asked specifically about emerging markets, 53% of investors interviewed stated they invest in emerging markets, with a further and 1 considering doing so. In terms of countries and regions within emerging markets presenting the best opportunities, Fig clearly shows that Asia takes the lead, with 5 of all investors interviewed citing it as a key region that is highly attractive for investment right now. China and India were specifically named by 26% and 12% of investors respectively. Within Latin America, Fig. 2.11: Investor Attitudes towards Different Fund Types at Present* Fig. 2.12: Regions Investors View as Presenting the Best Opportunities in the Current Financial Climate Small to Mid-Market Buyout Distressed Private Equity 16% 52% 62% North America 57% Venture Capital Secondaries Funds Large to Mega Buyout 14% 18% 19% 1 14% 1 Areas of the Market Investors View as Presenting the Best Opportunities Europe 52% Mezzanine Fund of Funds Growth 13% 14% 11% 8% 7% Areas of the Market Investors Are Seeking to Invest in Over the Next 12 Months Asia 31% Cleantech Other 4% 3% Rest of World 21% Source: Preqin Investor Interviews, June 2013 Source: Preqin Investor Interviews, June 2013 *Respondents were not prompted to give their opinions on each fund type individually; therefore, the results display the fund types at the forefront of investors minds at the time of the survey. 12

14 2. Private Equity Fig. 2.13: Countries and Regions within Emerging Markets that Investors View as Presenting the Best Opportunities** Fig. 2.14: Investor Intentions for their s to Emerging Markets Asia 5 10 South America 38% 9 21% 26% Africa 33% 8 Brazil China Central & Eastern Europe India Middle East 7% 12% 14% 26% 26% % 69% Increase Maintain Decrease Russia 7% Other 7% Source: Preqin Investor Interviews, June % Next 12 Months Long Term Source: Preqin Investor Interviews, June 2013 South America was named by a significant 38% of investors, with Brazil specifically named by 26% of LPs as presenting attractive investment opportunities. Africa, Central and Eastern Europe and the Middle East also were also named as favourable regions. In addition, we asked investors if they expect their allocations to investments in emerging markets to increase, decrease or stay the same over the next 12 months, and over the long term. A significant 73% of LPs interviewed plan to maintain their allocations to investments in emerging markets over the next 12 months, while a further 21% plan to increase their exposure to these regions. In the longer term, 9 plan to increase or maintain their allocation to investments in emerging markets, indicating investment in these regions may be set for further growth. **Respondents were not prompted to give their opinions on each country/region individually; therefore, the results display the countries and regions at the forefront of investors minds at the time of the survey. Investor Intelligence Investor Intelligence is the leading source of profiles and information on institutional investors in private equity funds. More than 5,100 active investors are profiled, including all types of institution from all regions worldwide Identify and profile potential investors for new vehicles. View direct contact information for key personnel. Receive customized alerts on key updates to investors strategies and plans. Keep up to date on the investment plans of individual institutions, updated following direct communication with our dedicated teams of research analysts. For more information on how Investor Intelligence can help you, or to arrange a demonstration, please visit:

15 Preqin Investor Outlook: Alternative Assets, H Attracting LP Capital and Due Diligence We examine what proportion of investors conduct due diligence on opportunities themselves compared to those that employ an investment consultant, how many LPs consider a GP s ESG policies before making a fund commitment and whether LPs consider being a first-close investor or view investing in a first-time fund attractive. The due diligence conducted by an investor into a fund is a long process whereby a number of factors are considered before the decision to commit to a fund are made. Preqin s interviews reveal that 61% of investors use an in-house team to conduct due diligence, while 21% employ an external investment consultant; the remaining 18% use a mixture of both. Those using both an in-house team and an external consultant are likely to employ an investment consultant to advise on a specific part of their portfolio, such as international investments or exposure to niche strategies. ESG Policies Alongside the strategic, financial and operational expertise fund managers bring to help a portfolio company grow, some GPs have begun to place emphasis on managing environmental, social and governance (ESG) issues to work towards a sustainable growth path. Preqin s interviews show that overall, the majority (67%) of investors will routinely look at the fund manager s ESG policies when conducting due diligence, with a further 14% considering the policies occasionally. Of the 19% of respondents that said they currently do not look at GPs ESG policies before making a commitment, 47% said they would consider doing so in the future, whereas 53% said they would not. First-Time Funds The recent economic environment has lead to increased caution among some investors, and as a result, has impacted their willingness to invest with first-time fund managers. Fig shows that 57% of investors interviewed will not consider investing in firsttime funds. Nineteen percent of LPs indicated they will invest in first-time funds, while 18% said they would consider doing so. A further 6% of LPs indicated that they would invest in a first-time fund if it was managed by a spin-off team. Spin-offs often attract commitments from investors that invested with the previous firm, or are familiar with the management team. The importance of the team is recognized by some investors as a crucial factor, as one US-based insurance company told us: [It] is almost more important than the data and performance of the fund itself. Fig. 2.15: Proportion of LPs that Look at a GP s ESG Policies Before Making a Commitment 19% Look at ESG Policies Investing Before a First Close The benefits of investing in a private equity vehicle before it has held its first close often include more favourable terms and conditions, such as an ability to negotiate board representation, co-investment rights or a reduction in management fees. Fortyfive percent of LPs stated they will invest in a fund before a first close, while a further 22% would consider doing so. 14% 67% Occasionally Look at ESG Policies Do Not Look at ESG Policies Source: Preqin Investor Interviews, June 2013 Fig. 2.16: Investor Attitudes towards Investing in a Fund before a First Close Fig. 2.17: Investor Attitudes towards Investing in First-Time Funds 33% 4 Will Commit to a Fund Before a First Close Will Consider Committing to a Fund Before a First Close 57% 19% 18% Will Invest in First- Time Funds Will Consider Investing in First-Time Funds Will Invest in Spin-Offs Only 22% Will Not Consider Committing to a Fund Before a First Close 6% Will Not Invest in First- Time Funds Source: Preqin Investor Interviews, June 2013 Source: Preqin Investor Interviews, June

16 2. Private Equity Alternative Methods of Accessing the Asset Class New methods of accessing private equity investments have emerged over time as the asset class has matured. Recently, the industry has seen a rise in separate account mandates and increased investor activity in direct investments and the secondary market. Separate Accounts An increasing number of institutional investors are recognizing the benefits of investing via separate accounts. The ability to forge closer relationships with GPs and to have a bespoke investment program tailored to their needs attract LPs to invest through separate accounts. Nineteen percent of investors Preqin spoke to actively invest via separate account mandates; this is a marked increase from the proportion of investors from the same time last year, when only 7% invested through separate accounts. Of those 19% that do invest in private equity via separate accounts, 64% stated that separate account commitments will become a permanent part of their investment strategy going forward, and a further 14% would consider making such investments permanent in the future (Fig. 2.18) Secondary Market Buying stakes in private equity funds via the secondary market is another way to for LPs to add value to their private equity portfolios. It also offers the opportunity to purchase interests at a discount to NAV and mitigate the J-curve in order to reach positive returns sooner. Furthermore, buying fund interests can also allow an LP to diversify its private equity portfolio by vintage year, strategy and geography, as well gain access to top-tier fund managers that may have been over-subscribed during their initial fundraising process. No investors interviewed by Preqin intend to decrease their level of activity on the secondary market over the following year, with a notable 4 expecting to increase their secondary market investments over the next 12 months. Direct Investments Direct investments can be beneficial to investors by allowing them to have greater exposure to certain industries or geographies, with the potential to provide increased returns. Of the LPs interviewed, 29% invest directly in portfolio companies on a proprietary basis, while 32% currently co-invest alongside GPs in their portfolio companies; 5 do not invest directly at all. As Fig shows, 48% of LPs interviewed that already invest directly intend to increase their direct investment activity in the next 12 months and over half (53%) plan to increase their level of co-investments. This indicates an increasing number of LPs will be looking to make direct investments in the year ahead in order to complement their existing private equity portfolios and to take advantage of the benefits associated with direct investments. Fig. 2.18: LPs Investing in Separate Accounts: Proportion that Expect Separate Accounts to be a Permanent Feature of Their Private Equity Portfolios Preqin s Secondary Market Monitor: A Vital Tool Track activity across the secondary market using Preqin s Secondary Market Monitor, including information on investors buying and selling private equity, real estate and infrastructure fund interests, details of secondaries funds in market and closed historically, secondaries transactions, and much more. For more information, please visit: Fig. 2.19: Investors Expectations of Their Direct Investment and Secondary Market Activity in the Next 12 Months 10 14% 22% 64% Separate Accounts Will Be a Permanent Feature Will Consider Separate Accounts Being a Permanent Feature Separate Accounts Will Not Be a Permanent Feature Active in Each Area % 4 7% Direct Investments in Companies on a Proprietary Basis 53% 44% 3% Direct Investments in Companies as a Co- Investor Alongside Fund Managers 4 6 Secondary Market (as a Direct Participant, Not Via Secondary Fund of Funds) Increase Level of Activity Maintain Level of Activity Decrease Level of Activity Source: Preqin Investor Interviews, June 2013 Source: Preqin Investor Interviews, June

17 Preqin Investor Outlook: Alternative Assets, H Fees and Alignment of Interests As the private equity industry has evolved over recent years, the relationship between GPs and LPs has inevitably changed; a greater proportion of investors are now satisfied with their GP relationships compared to previous years. However, there are still a number of fund terms and conditions investors feel need to be amended to improve GP-LP relations. As shown in Fig. 2.20, 44% of investors interviewed intend to increase the number of GP relationships in their portfolios over the next two years, primarily to gain exposure to new strategies or geographies that their existing managers may not offer. While 36% of respondents intend to maintain their current number of GP relationships, fund managers that have not performed as expected are likely to be replaced with new GPs. A fifth of investors will be looking to reduce the number of GP relationships over the course of the next two years, which allows investors to develop deeper and more strategic relationships with their existing fund managers. Over time, the industry has seen an increase in the proportion of investors that agree that GP and LP interests are properly aligned. As of the end of H1 2013, 67% of investors interviewed agree that GP and LP interests are properly aligned, compared to 62% of respondents at the end of H (Fig. 2.21). While GPs have some reliance on networks and previous relationships with LPs, it is important for them to maintain and build new relationships with investors and ensure interests are properly aligned. Key Issues in LP and GP Relations 6,400 Reasons to Contribute Data to Preqin Over 6,400 investment professionals across 2,900 investors rely on Preqin data and Preqin Investor Network to source fund investment opportunities and conduct initial due diligence on their alternative investments. Contribute data to Preqin and help investment professionals cut through the crowded marketplace and find out what makes your offering unique. For more information, please visit: Fig. 2.20: Investors Intentions for GP Relationships over the Next Two Years 44% Increase No. of GP Relationships Management fees have consistently been at the forefront of investors minds as an area within fund terms and conditions which needs improvement; a significant 59% of investors interviewed highlighted management fees as an area of contention at present. Over a third (3) of LPs cited the amount of capital committed by a GP as an area within fund terms and conditions that needs improvement, while carry structure and rebate of deal-related fees were named by 27% and 16% of investors respectively. 36% Maintain No. of GP Relationships Decrease No. of GP Relationships Source: Preqin Investor Interviews, June 2013 Fig. 2.21: Proportion of Investors that Feel GP and LP Interests are Properly Aligned, June June 2013 Fig. 2.22: Fund Terms Investors Feel Need to be Amended to Improve LP and GP Relations % 4% 58% 63% 31% 32% 8% 1% June 2012 June 2013 Strongly Agree Agree Disagree Strongly Disagree % Management Fees 3 Amount Committed by GP 27% Carry Structure 16% Rebate of Deal-Related Fees 12% Hurdle Rate Non-Financial Clauses 6% Payment of Fees on Uninvested Capital Other Source: Preqin Investor Interviews, June June 2013 Source: Preqin Investor Interviews, June

18 3. Hedge Funds Hedge Funds Investors Focus on Regulation and Performance Section Three: Hedge Funds There are three key pressures on fund managers in this challenging fundraising environment: to generate strong riskadjusted performance, to show flexibility to respond to investor demands for alignment of interests, especially fees, and to comply in this new era of regulation. Positively, investor sentiment towards hedge fund performance has shown a marked improvement over the past 12 months; the majority of investors feel that hedge fund investments have met expectations over the previous year, with the proportion of investors stating hedge funds had fallen short of expectations (26%) dropping to its lowest level since Preqin began conducting this study in Although a return to good performance is important for restoring confidence in the industry as a whole, investors recognize there are other more important factors to consider when looking individually at hedge funds, with the strategy of the fund and the managers experience topping investors list of key attributes to assess when looking at a hedge fund. Coupled with an improved outlook on performance, investors have also seen management and performance fees reaching a more acceptable level over the past 12 months. However, fund managers should not rest on their laurels; there is more work to be done in aligning interests in terms of fees, and greater transparency at a fund level is also an area where further improvements seem necessary. Regulation is a cause for much uncertainty in the industry, with the full impact of the latest wave of regulations yet to be felt. Many investors are unsure how it will affect the hedge fund industry as a whole and their allocations individually, with 22% of investors believing regulation to be negative and 43% unsure of its impact. It may be many months or even years before the full influence of regulation on the industry becomes clear. However, what is certain is both fund managers and investors alike will be paying particular attention to how these regulations are affecting their businesses and investments in the asset class. Preqin conducted interviews with institutional investors in hedge funds in July 2013 to uncover their outlook on performance, alignment of interests, regulations and more. Here we present the findings of our investigation into a number of key topics that affect investors in hedge funds and the industry as a whole. Key Facts 88% of hedge fund investors plan to commit the same amount or more capital to hedge funds over the next 12 months. 77% of investors stated that there has been no change in their confidence in hedge funds to meet portfolio objectives in the last year. 4 of current investor searches include a long/short equity component, making it the most sought after strategy currently. 64% of investors either agreed or strongly agreed that manager and investor interests are properly aligned, compared to 74% in of investors interviewed have exited a hedge fund investment due to performance concerns. 38% of investors expect to increase their allocation to single-manager hedge funds in the next 12 months, compared with just 8% of investors that expect to increase their allocation to funds of hedge funds. 17

19 Preqin Investor Outlook: Alternative Assets, H Key Issues and Regulation Preqin s interviews with leading institutional investors in hedge funds reveal that performance is still a key issue for many investors in the asset class, along with fees and the potential impact of regulation, such as the Alternative Investment Fund Managers Directive (AIFMD). Institutional investors interviewed by Preqin were asked what they feel the key issues are in the hedge fund industry, with the results presented in Fig Performance was the most commonly named issue, with 3 of investors interviewed stating returns to be a key issue for the hedge fund industry at present. This demonstrates that a number of investors remain concerned about hedge fund performance, although the proportion of investors stating this as a key issue has decreased from 47% in December 2012, suggesting that hedge funds have performed well enough to convince some investors in the early stages of There is a sense that investors are looking for more consistency in hedge fund returns however, with the proportion of investors interviewed citing volatility as a key issue increasing from 9% to between December 2012 and July Investors are looking for hedge funds to produce consistent positive returns in all market environments and some may be willing to accept lower returns in return for reduced volatility. There was also a noticeable increase in the number of investors stating correlation, separating alpha from beta, as a key issue, with a 12 percentage point increase from 2% in December 2012 to 14% in July Fees and regulation remain important issues to hedge fund investors, with these issues stated by 26% and 23% of respondents respectively. The proportion of investors stating transparency as a key issue has dropped by twelve percentage points since the end of 2012, from 23% in December 2012 to 11% in July 2013, indicating that investors have become more satisfied with the information being provided by hedge fund managers. Impact of Regulations on Hedge Fund Investors Regulation has been a topic of increased discussion in the hedge fund industry in recent years as a result of proposed regulations such as the Alternative Investment Fund Managers Directive (AIFMD). Preqin s interviews with hedge fund investors in July 2013 indicated that the vast majority (94%) have yet to notice any direct effect on their hedge fund allocations as a result of recent regulations, although a number of investors indicated concerns over how regulations would affect the industry in the future. In terms of the overall effect on the hedge fund universe, 3 of investors feel regulations are positive for the hedge fund industry, with 22% stating that they believe regulations will have a negative impact. The remaining 43% of investors are unsure about the impact of proposed regulations, suggesting that they are waiting to see how they are implemented in full before forming a definitive view. This is a significant increase compared to the 18% of investors interviewed in December 2012 which stated the same, suggesting that investors have become unsure about the benefits of proposed regulations during the first half of Having a consistent regulated standard for hedge funds, along with more transparent reporting, could help institutional investors in assessing managers. One of the main concerns regarding regulation centres on a lack of clarity and there is a fear that this could lead to a tougher environment with more complications and ultimately less choice for investors as managers struggle to comply. Institutional investors will be watching closely to see the effect of proposed regulations and it may be 2014 before it is possible to tell if the new proposals will have any direct effect on investors hedge fund allocations. Fig. 3.1: Key Issues Facing the Hedge Fund Industry According to Institutional Investors Fig. 3.2: Investor Outlook on Hedge Fund Industry Regulations Launched in % 23% 19% 14% 11% 8% 4% 7% 43% 22% 3 Regulations are Positive for the Hedge Fund Industry Regulations are Negative for the Hedge Fund Industry Unsure About the Impact of Regulations Performance Fees Regulation Volatility Economic Environment Correlation Transparency Liquidity Consolidation Other Source: Preqin Investor Interviews, July 2013 Source: Preqin Investor Interviews, July

20 3. Hedge Funds Fund Searches Overview In general, hedge fund investors are mainly positive about the asset class, with the majority planning to at least maintain their current allocations to hedge funds going forward, and a significant proportion looking to increase their exposure. Institutional investors regularly review their hedge fund portfolios in order to take advantage of the best opportunities and tap into new sources of returns. In July Preqin interviewed hedge fund investors to ask about their outlook for the asset class and whether or not they expect to make further allocations over the coming 12 months. Of those investors interviewed, 59% said they plan to invest the same amount of capital in hedge funds over the next 12 months as they have in the previous 12 months, with 29% planning to invest more and 12% planning to invest less. In terms of hedge fund allocations in the longer term, the majority again plan to maintain current hedge fund exposure (59%), with 23% expecting to increase their allocations and 18% expecting to decrease their allocations (Fig. 3.3). This shows that the outlook among hedge fund investors is mainly positive as the majority of investors plan to at least maintain their current level of exposure going forward, with the net movement towards an increase in allocations. Investors regularly make new additions to their hedge fund portfolios, with the majority of investors interviewed (62%) making new hedge fund investments at least once a year (Fig. 3.4). Twenty-nine percent of investors make hedge fund additions every quarter; as a result, there are regular opportunities for hedge fund managers to obtain capital from the institutional universe. Long/short equity continues to be the most sought after strategy among institutional hedge fund investors, with 4 of current investor searches including a long/short equity component (Fig. 3.5). Long/short equity funds have enjoyed mostly positive performance over the past 12 months and investors are attracted to these funds due to the diversification they can provide. Macro funds are being targeted by 28% of investors searching for new funds, despite recent disappointing performance, with event driven funds appearing in 17% of current mandates. It seems that despite event Fig. 3.4: Frequency of New Hedge Fund Investments Made by Institutional Investors driven being the best performing strategy over the past 12 months, many investors remain reluctant to take on the illiquidity of these investments as part of their hedge fund allocations. Fig. 3.3: Investor Plans for their Hedge Fund s in the Next 12 Months and the Longer Term Looking to source new investors for your hedge fund? Preqin s Hedge Fund Investor Profiles can help. The online service features detailed profiles of over 4,200 active hedge fund investors, including current fund searches and open mandates issued, key contact information, and more. For more information, please visit: % 59% 12% Next 12 Months Fig. 3.5: Strategies Being Targeted by Hedge Fund Investors over the Next 12 Months 23% 59% 18% Plan to Increase Hedge Fund Plan to Maintain Hedge Fund Plan to Decrease Hedge Fund Longer Term Source: Preqin Investor Interviews, July % Once a Month Quarterly 4% Three Times per Year 1 Biannually 14% Annually 4% Every 18 Months 3% Every Two Years 1 Longer Term 14% Other Proportion of Investors Long/Short Equity 28% Macro 17% 17% Event Driven Multi-Strategy 1 14% Long/Short Credit Managed Futures/CTA Distressed 9% Equity Market Neutral 7% 6% Relative Value Arbitrage Fixed Income Arbitrage Source: Preqin Investor Interviews, July 2013 Source: Preqin Hedge Fund Investor Profi les 19

21 alternative assets. intelligent data. Looking to source new investors for your fund? Hedge Fund Investor Profiles can help. Access extensive information on over 4,200 active hedge fund investors, including key contact details. Be the first to know about investors fund searches and latest mandates, as well as their current and target allocations to hedge funds. Filter potential investors by investment plans, strategy, structural and geographic preferences, and more. Take advantage of comprehensive information that is updated frequently by a dedicated team of skilled research analysts based around the globe. Hedge Fund Investor Profiles is an essential tool for sourcing the most up-to-date information on institutional investors and their investment preferences and plans. Arrange a demonstration today, and fi nd out how Hedge Fund Investor Profiles can help you: New York London +44 (0) Singapore San Francisco

22 3. Hedge Funds What Are Investors Looking for in a Hedge Fund Manager? In general the outlook of institutional investors interviewed by Preqin in July 2013 was more positive than in a similar study in 2012, with investors boosted by a run of positive performance for the hedge fund industry. Investors are demanding more from their hedge fund managers and they take a number of factors into account when selecting appropriate funds for investment. Key Factors in Hedge Fund Manager Selection The key factors highlighted by investors in the manager selection process were source of returns/strategy and management experience/background, with both of these factors mentioned by 57% of respondents (Fig. 3.6). The proportion of investors interviewed indicating the source of returns/strategy as a key factor has increased from a similar study in December 2012, when 39% of respondents mentioned this factor, suggesting that investors are now more concerned about the method behind the performance. Investors are realizing that examining the source of returns/ strategy of a manager could be more effective in the longer term, rather than simply selecting managers with positive short-term returns. Performance remains important to investors, although the proportion of respondents stating returns as a key factor in the initial selection process has dropped from 54% to 44% over the same period. Investors also take a number of other factors into account when selecting hedge fund managers. Liquidity, transparency, and risk profile were also stated as key factors by investors interviewed, although the proportion of investors mentioning all three has decreased over the past year. Fees are less important in the initial screening process, with only 1 of investors selecting this as a key factor; investors are keen to look for suitable funds before considering costs. Reasons for Investor Redemptions from Hedge Funds Investors are willing to make changes to their hedge fund portfolios where necessary, with more than half of the investors surveyed Fig. 3.6: Key Factors Used by Institutional Investors to Evaluate Hedge Fund Managers (5) stating that they make redemptions from their hedge fund portfolio at least once a year. Investors were also asked about their typical reasons for exiting hedge fund investments, with the results presented in Fig Although performance was not the top factor in manager selection, it is the main reason for investors redeeming from hedge funds, with 6 of investors stating unsatisfactory returns as a key reason for exiting investments. Strategy or style drift is also an important factor in redemptions, named by 41% of respondents, as investors can become concerned if a manager switches from its initial investment strategy. A sizeable proportion of investors (4) make redemptions as a result of their current macroeconomic view, in order to take advantage of the strategies that are presenting the best opportunities. Investors cited a number of other factors as reasons for making redemptions including concerns over fund size, concerns over illiquid assets, personnel concerns and a need to make redemptions for liquidity or rebalancing purposes. Outlook From Preqin s detailed interviews with hedge fund investors, it is clear that performance, manager experience, and fund strategy are the components that investors view as the most important in the fund selection process. Investors are willing to make regular changes to their portfolios if funds have poor performance or a drift in strategy in order to ensure they are invested with the most effective managers that meet their portfolio objectives. As a result, managers need to ensure they have consistent returns and a clearly defined strategy, as well as ensuring all other aspects of their operation are satisfactory, in order to continue to obtain capital from institutional investors. Fig. 3.7: Institutional Investors Reasons for Exiting Hedge Fund Investments Management Experience/Background Source of Returns/Strategy Established Track Record Returns Risk Profile Transparency of Holdings Fees Domicile Liquidity Profile Client Service 16% 1 13% 9% 26% 44% 46% 57% 57% Performance Concerns Concerns over Strategy Drift of the Hedge Fund Change in Internal Portfolio Strategy of the Investor Fund Has Become Too Big Concerns over Illiquid Assets/Side Pockets Fund Has Become Too Small Looking to Reduce Exposure to Hedge Funds Concerns over Use of Leverage Lack of Transparency 9% 9% 8% 7% 41% 4 6 Other 3 Other 39% Source: Preqin Investor Interviews, July Source: Preqin Investor Interviews, July

23 Preqin Investor Outlook: Alternative Assets, H Satisfaction with Returns Hedge funds face a constant battle to live up to expectations, with institutional investors becoming more demanding with regards to their hedge fund portfolios. Preqin s recent interviews with hedge fund investors provide an important insight into investors expectation and confidence in the asset class. The majority of investors interviewed (64%) stated that their hedge fund investments had met expectations over the past 12 months, with 26% stating that hedge funds had fallen short of expectations and stating that hedge funds had exceeded expectations (Fig. 3.8). This shows that the majority of investors have been satisfied with hedge fund performance over the previous 12 months, suggesting that the outlook for the asset class is fairly positive. The proportion of investors stating that hedge funds have fallen short of expectations has reduced from 41% in 2012 and is at its lowest level since Preqin began conducting this study in Fig. 3.9 shows those strategies that investors feel have exceeded or fallen short of expectations over the previous 12 months. CTA and macro funds have been the most disappointing to investors over the last year, with 31% and 27% of investors stating that these strategies have underperformed respectively. These strategies have struggled for positive performance over the past 12 months. Long/short equity was the strategy most commonly cited as having performed well over the last 12 months. However, 2 of investors felt that long/short equity funds have performed poorly in the last year, suggesting that there is a large variation between the best and worst performers in the strategy. Event driven has been the best performing strategy over the past 12 months and 23% of investors stated that they feel these funds have exceeded expectations over this period. Investor confidence in hedge funds has remained relatively constant over the past 12 months, with 77% of investors stating that there has been no change in their confidence in hedge funds to meet portfolio objectives. Those reporting a change were almost equally split, with 11% reporting increased confidence in Fig. 3.9: Hedge Fund Portfolio Performance Relative to Expectations of Institutional Investors by Strategy hedge funds and 12% reporting decreased confidence in hedge funds. This is more positive than a similar Preqin study in August 2012, which revealed that 24% of investors reported decreased confidence in hedge funds over the previous 12 months and just 1% of investors reported having increased confidence. Overall, it seems that the majority of investors are becoming more confident in the benefits of hedge funds, as funds have improved in generating sustained risk-adjusted returns. Fig. 3.8: Hedge Fund Portfolio Performance Relative to Expectations of Institutional Investors, Use Preqin s Hedge Fund Analyst to access the performance of over 6,300 hedge funds and share classes, view how different strategies are performing, and much more. For more information, please visit: % 11% 53% 38% 62% 19% 53% 27% 28% Fig. 3.10: Change in Investor Confidence in Hedge Funds over the Last 12 Months 11% 49% 3% 57% 4 41% 64% 26% Hedge Fund Returns Exceeded Expectations Hedge Fund Returns Met Expectations Hedge Fund Returns Have Fallen Short of Expectations Source: Preqin Investor Interviews, July % 29% % 2 CTAs Macro Long/Short Equity 18% 17% Fixed Income 23% 13% 11% 11% 11% 9% 9% Distressed Event Driven Strategy 4% Relative Value Market Neutral 8% 8% 7% Long Bias Multi-Strategy Returns Have Fallen Short of Expectations Returns Have Exceeded Expectations 12% 77% 11% Increased Confidence in Hedge Funds No Change Decreased Confidence in Hedge Funds Source: Preqin Investor Interviews, July 2013 Source: Preqin Investor Interviews, July

24 3. Hedge Funds Fees and Alignment of Interests One of the key topics in the hedge fund industry over the past few years has been the discussion over the terms and conditions of hedge funds, as investors question both the traditional 2 and 20 structures and the liquidity and transparency of these alternative assets. Preqin s interviews with institutional investors in July 2013 reveal important trends in investors attitudes towards fund terms and conditions, and how they have evolved over time. In this new era of heightened regulation and scrutiny of funds, the terms on hedge funds have never been more relevant; as manager costs increase in order to comply with various international regulations, investors will be watching to see if these costs are passed on, as well as the effect regulations have on reporting and transparency requirements. Preqin has conducted studies of investor attitudes towards fund terms and conditions since Here we present the results of our latest study of investors conducted in July Alignment of Interests Remains an Issue for Some Investors A significant proportion (42%) of all investors interviewed witnessed a shift in favour of the investor regarding changing terms and conditions over the past 12 months, compared to just 4% that feel that there has been a change in favour of fund managers (Fig. 3.11). However, fewer investors in 2013 feel that manager and investor interests are aligned than in the previous year. Sixty-four percent of investors interviewed in July 2013 either agreed or strongly agreed that manager and investor interests are properly aligned, as shown in Fig. 3.12, compared to 74% in With more than half of respondents (54%) indicating that they had seen no change in fund terms over the past year, managers still have a way to go in reaching an optimum equilibrium of having appropriate fees and structures to run a fund in the best possible way while representing good value for the investor. Fees Have Shown Improvement The traditional 2 and 20 fee structure has come under increasing pressure over recent years, with many investors seeking reduced Fig. 3.11: Investor Opinion on Changes in the Alignment of Interests between Investors and Managers over the Past 12 Months fees. Fig indicates that managers have responded to this, with 68% of investors seeing an improvement in management fees charged over the past 12 months and 58% stating the same for performance fees. Where there have been improvements, many investors specified that these are often just for the larger investors, on smaller funds, or on funds which only produce mediocre performance. As a result, many investors believe there is still room for improvement across the wider industry, with 5 of investors interviewed still seeking further reductions in the level of both management and performance fees. However, this is the first year that Preqin has conducted the fee study in which more investors have indicated they have witnessed improvements in management and performance fees than have signalled they want further improvements. Where further improvement seems particularly necessary is on the performance fee side. Investors would like to see more fund managers considering alternative structures for charging fees, such as instigating clawback provisions or putting in a hurdle which must be met before a performance fee is charged, or increasing the level of the existing hurdle. As more managers are setting their fees lower than the perceived 2 and 20 standard, investors are also looking to enter negotiations over terms in the pre-investment stages. Since 2012, we have witnessed more investors asking their managers for concessions; the number of investors looking to negotiate has increased from 46% in 2012 to 57% in Of those that entered into negotiations with their managers, 83% of investors were successful in securing more favourable terms, slightly below the 87% that were successful in negotiations in Fig. 3.12: Investor Opinion on the Alignment of Interests between Investors and Managers 54% 4% 42% Significant Change in Favour of Investors Slight Change in Favour of Investors No Change Slight Change in Favour of Managers Significant Change in Favour of Managers 29% 7% 2% 62% Strongly Agree that Investor and Manager Interests are Aligned Agree that Investor and Manager Interests are Aligned Disagree that Investor and Manager Interests are Aligned Strongly Disagree that Investor and Manager Interests are Aligned Source: Preqin Investor Interviews, July 2013 Source: Preqin Investor Interviews, July

25 ISBN: $175 / 95 / Preqin Global Hedge Fund Report alternative assets. intelligent data. alternative assets. intelligent data. Preqin Investor Outlook: Alternative Assets, H Hedge Funds Managers Have Responded to Liquidity and Transparency Demands There have been significant improvements in how investors view the liquidity and transparency terms of hedge funds over the past year. In 2012, 39% of investors were looking for increased transparency from their hedge fund managers, whereas in 2013 this has fallen to 22%. However, it is important to note that just 8% of investors feel that they have seen improvements to the amount of transparency offered to them by their fund managers over the past year; managers may feel that their work on reporting more data more frequently to investors is complete, whereas many investors still want more transparency on the performance, risk and investments of their funds. Fig. 3.13: Areas of Fund Terms Investors Feel Have Shown the Most Improvement over the Past 12 Months and that Need to Improve Further in the Future Hedge fund investors have become more comfortable with the level of liquidity in the industry following several years of improvements by fund managers. Approximately a quarter and a fifth of investors interviewed stated they have seen reduced lockups and more frequent redemption policies on hedge funds over the past year respectively. In 2012, 37% of investors wanted to see improvements on the lock-up terms of a fund, whereas in 2013 this has fallen to 12%. Similarly, in 2012, 34% of investors wanted to see more appropriate redemption frequencies, while today this has fallen to just of investors. So for some investors, further improvements are needed, but for the industry as a whole, it is largely reaching a level where investors feel that the liquidity terms on funds have become appropriate based on the fund s strategy. Fig. 3.14: Investors Fund Terms Negotiation Experiences in the Past 12 Months % 5 58% 5 49% 37% 24% 21% 14% 12% 3% 3% 4% 22% 8% 8% 16% Areas that Have Improved over the Last 12 Months Areas that Investors Want to Improve Further 43% 41% Have Attempted Negotiations and Were Successful in Arranging a Reduction in Fees Have Attempted Negotiations and Were Unsuccessful at Reducing Fees Management Fees Performance Fees - Amount Performance Fees - How They Are Charged (e.g. Clawback provisions) Hurdle Rate Manager Commitment to Fund Reducing Lock-Up Period More Favourable Redemption Frequency Redemption Fees Increased Transparency at Fund Level Other 16% Have Not Attempted Negotiations for Better Fees Source: Preqin Investor Interviews, July 2013 Source: Preqin Investor Interviews, July 2013 Looking for reliable, up-to-date research on all aspects of alternative assets? The Preqin Quarterly Update: Private Equity Content Includes: Fundraising We review the latest fundraising figures, including regional breakdown, time spent on the road, and the largest funds to close in the quarter. Investors We take a look at investor appetite for private equity in the year ahead, including geographies and strategies to be targeted. Buyout Deals We examine private equity buyout deals and exits in Q by type, value and region. Venture Capital Deals We provide a breakdown of the latest venture capital deal activity by value, region and stage. Performance Welcome to the latest edition of Hedge Fund Spotlight, the monthly newsletter from Preqin providing insights into the hedge fund industry, including information on investors, funds, performance and more. Hedge Fund Spotlight uses information from our online product Hedge Fund Online, which includes Hedge Fund Investor Profi les and Hedge Fund Analyst. March 2013 Volume 5 - Issue 3 FEATURED PUBLICATION: 2013 Preqin Global Hedge Fund Report Click here to fi nd out more or to purchase a copy. New York: One Grand Central Place 60 E 42nd Street Suite 2544 New York NY London: Equitable House 47 King William Street London, EC4R 9AF +44 (0) Singapore: One Finlayson Green #11-02 Singapore Silicon Valley: 303 Twin Dolphin Drive Suite 600 Redwood City CA info@preqin.com Twitter: LinkedIn: Search for Preqin We analyze the latest performance data for private equity funds, featuring dry powder figures, IRRs by fund type and vintage, and the PrEQIn Private Equity Quarterly Index. Q Hedge Fund Spotlight Content Includes: March 2013 Feature Article UCITS: Liquidity, Transparency and Lower Volatility UCITS-compliant funds have risen in prominence in recent years, but what is the most commonly employed strategy for these funds, and what is their recent performance? We examine the use of the UCITS model as a wrapper for hedge funds. Page 2 Secondary Transactions We review the private equity secondary market in 2012, including a look at the key players. Fundraising We look at historical secondaries fundraising and the outlook for the year ahead. Investor Appetite We explore investor appetite for the private equity secondary market which LPs plan to buy and sell fund interests in 2013? ISBN: $175 / 95 / Lead Article US Investors in Hedge Funds US-based investors in hedge funds represent a signifi cant proportion of the capital invested in the asset class, but what strategies and regions are they specifi cally targeting? We analyze US investors in hedge funds. Page 7 Industry News We analyze the latest UCITS fund launches, as well as investors targeting these funds. Page 11 The Facts Performance Benchmarks - We look at February s hedge fund performance data. Page 13 Investors in Asia-based Fund Managers - We focus on investors targeting Asia-based fund managers. Page 14 Fund Searches and Mandates - Which regions and strategies are hedge fund investors targeting? Page 15 Brazilian Hedge Funds - We examine Brazil-based hedge funds. Page 17 Conferences - Details of upcoming hedge fund conferences around the world. Page 18 Free Subscription: Preqin Special Report: Private Equity Secondary Market Will Growth Continue in 2013? March 2013 You can download all the data in this month s Spotlight in Excel Wherever you see this symbol, the data is available for free download on Excel. Just click on the symbol and your download will begin automatically. Feel free to use the data in any presentations, but please remember to cite Preqin as your source. alternative assets. intelligent data. Click here to sign up to receive your free edition of Hedge Fund Spotlight every month! 2013 Preqin Global Hedge Fund Report Preqin - the ultimate destination for all of your research needs. Monthly Spotlight Newsletters Quarterly Updates Special Reports Annual Global Reports alternative assets. intelligent data. alternative assets. intelligent data. 24 For the latest free research on alternatives, visit:

26 3. Hedge Funds Direct Hedge Funds vs. Funds of Hedge Funds: In Focus The institutional hedge fund investor landscape continues to change over time as investors become more experienced when investing in the asset class. Over time we have seen new investors entering the asset class via funds of hedge funds while the more experienced investors move towards direct investments. In this section, we examine current investor attitudes towards the two investment styles. Funds of hedge funds have endured a difficult time over the last few years as a result of poor performance and some concerns about their role in the industry. A number of investors have shifted towards direct investments as they aim to gain more control over their hedge fund portfolios and as a result we have witnessed a decline in the size of the funds of hedge funds sector. Direct Funds versus Funds of Hedge Funds Using data from Preqin s Hedge Fund Investor Profiles, the current breakdown of the method of investment for each hedge fund investor type is presented in Fig All investor groups have shown a reduction in the proportion of investors utilizing funds of hedge funds over the past 12 months. The biggest change has been noted among private sector pension funds, with a six percentage point reduction in investors of this type committing solely through funds of hedge funds between December 2012 and July Public pension funds have the greatest proportion of investors investing through funds of hedge funds, with 57% of this investor type committing to hedge funds solely through multi-manager vehicles, but these investors have also seen a decrease in appetite for funds of hedge funds, with a two percentage point swing from funds of hedge funds to direct investments so far in Changing Landscape of Hedge Fund Investing Fig shows the investment method of institutional hedge fund investors when they first entered the hedge fund asset class. The highest proportion of investors (41%) began investing in hedge funds solely through funds of hedge funds, with 36% investing solely through direct investments and 23% investing through a combination of the two methods. Investors see the benefits of investing through funds of hedge funds initially, as it allows them Fig. 3.16: Investment Method of Institutional Investors when First Investing in Hedge Funds to outsource manager selection to industry experts while they gain experience investing in hedge funds. Investors will often switch to direct investments as they gain more knowledge of hedge funds; Fig shows that only 22% of the same investors now invest solely through funds of hedge funds. However, funds of hedge funds are still utilized by 62% of these investors in some capacity, showing that the investment method remains relevant to many investors. Direct Investments Of those investors interviewed that now invest solely through direct investments, 63% had previously invested through funds of hedge funds, highlighting that the majority of these investors have changed their investment style since they first began investing in the asset class. Avoiding the double layer of fees is the most common Fig. 3.15: Breakdown of Institutional Investor Types by Hedge Fund Investment Approach Proportion of Investors % 32% Endowment Plan 68% 26% Family Office 33% 31% 43% 2 31% 37% 36% 32% 32% Foundation Insurance Company Private Sector Pension Fund 17% 57% 26% Public Pension Fund 2 5 Sovereign Wealth Fund Direct Funds Funds of Hedge Funds Mixture of Direct and Funds of Hedge Funds Source: Preqin Hedge Fund Investor Profi les Fig. 3.17: Breakdown of Investor Hedge Fund s by Proportion of Invested via Funds of Hedge Funds 23% 41% Funds of Hedge Funds 38% 22% 10 Funds of Hedge Funds 75-99% Funds of Hedge Funds Direct Funds 50-74% Funds of Hedge Funds 25-49% Funds of Hedge Funds 36% Mixture of Direct and Funds of Hedge Funds 7% 8% 15-24% Funds of Hedge Funds 1-14% Funds of Hedge Funds 10 Direct Funds Source: Preqin Investor Interviews, July 2013 Source: Preqin Investor Interviews, July

27 Preqin Investor Outlook: Alternative Assets, H reason for investors moving away from funds of hedge funds into direct investments, with two thirds of respondents stating this as a key factor (Fig. 3.18). More than half of investors interviewed also mentioned that they have constructed a direct hedge fund portfolio in order to gain more control over their investments. Once investors have sufficient experience in the hedge fund asset class they often feel that they can conduct their own due diligence in order to select suitable hedge fund managers. After they reach this stage they are less likely to be willing to pay the extra layers of fees associated with funds of hedge funds. Funds of Hedge Funds Despite funds of hedge funds enduring a difficult time in recent years, the multi-manager structure is still utilized by a significant proportion of investors. The main reason for investors choosing to invest through multi-manager vehicles is a lack of internal resources, which means they do not have the necessary expertise to invest directly, with 5 of respondents highlighting this as a key reason (Fig. 3.19). Investors are also attracted to funds of hedge funds for diversification purposes as such investments allow them to gain exposure to a broad range of hedge fund managers through a single investment. The multi-manager model can be valuable for less established hedge fund investors as it allows them to gain access to hedge funds while being able to outsource manager selection and due diligence to fund of hedge funds managers. Combination of Direct Funds and Funds of Hedge Funds Of those investors that currently invest through a mixture of direct fund investments and funds of hedge funds, 54% stated that they expect their allocation between the two investment types to remain approximately the same over the next 12 months (Fig. 3.20). A further shift to direct investments is highlighted, with 38% of investors expecting to increase their allocation to single-manager hedge funds, compared with just 8% of investors that expect to increase their allocation to funds of hedge funds. Lower fees was again the most common reason for investors switching to direct investments (57% of investors interviewed stated this as a key reason). Stronger returns was another common reason (43%), suggesting that investors are disappointed with the recent poor performance of the fund of hedge funds industry when compared to the wider hedge fund performance benchmarks. Fig. 3.19: Reasons for Investors Preferring Fund of Hedge Funds Investments Outlook Preqin s latest interviews with investors highlight the challenging environment for fund of hedge funds managers, with investors continuing to shift their portfolios towards direct investments. Investors have been making the switch in recent years in order to gain more control over their investments and avoid the additional layer of fees associated with multi-manager structures. The relatively dampened performance of funds of hedge funds has added to this challenge, and managers of these structures need to convince institutional investors that they remain relevant. However, with more than half of all institutional investors continuing to utilize at least one fund of hedge funds, there remains attractive opportunities for those fund of hedge funds managers that are best at adapting to investor demands. Fig. 3.18: Reasons for Investors Preferring Direct Hedge Fund Investments Filter extensive profiles of over 4,200 active hedge fund investors by their strategy preferences on Preqin s Hedge Fund Investor Profiles. For more information, or to arrange a demonstration, please visit: % Lower Fees 52% More Control over Investments 29% Increased Resource/ Experience In-House 19% 19% Decreased Confidence in Funds of Hedge Funds Seeking Better Returns More Fund Choice Advice of Consultant Concerns over Fund of Hedge Funds Due Diligence 19% Other Source: Preqin Investor Interviews, July 2013 Fig. 3.20: Next 12 Month Plans for Investors Currently Investing in Both Direct Funds and Funds of Hedge Funds Lack of Resources/ Expertise 27% Diversification Purposes 9% 9% 9% 9% Increased Transparency Lower Volatility More Due Diligence Advice of Consultant Source: Preqin Investor Interviews, July % 8% 38% Plan to Increase to Direct Funds Plan to Increase to Funds of Hedge Funds Plan to Keep s Approximately the Same Source: Preqin Investor Interviews, July

28 4. Real Estate Real Estate Section Four: Real Estate Growth in the Long Term Fundraising for private real estate funds looks set to remain a tough prospect in the coming year. While there are investors that expect to put a significant amount of capital to work in the coming year, many others are not expecting to make any new commitments. Only 42% of respondents made commitments in the past year, and just 4 of investors plan to invest in the in next 12 months. While there are numerous factors affecting investor attitudes, the wider economic environment and the impact it will have on real estate appears to be the biggest factor, with 42% naming this as a key issue affecting the private real estate market. However, there are investors set to allocate significant amounts of capital to the asset class. Of all investors expecting to be active, 48% plan to commit at least $100mn to private real estate in the next 12 months. As would be expected, larger investors are more likely to be investing, with 64% of investors with assets under management of $10bn or more planning new commitments. set to invest in Europe- or North America-focused funds. Of Asiabased investors searching for new funds, 39% are targeting North America, with the same proportion targeting Europe. Appetite for higher risk-return profile investments is now increasing among institutional investors. Opportunistic funds are now the most widely targeted strategy, with 54% of investors actively searching for new funds seeking opportunistic exposure, while 51% are targeting value added funds. There is still significant appetite for core however, with 47% of investors targeting the strategy. While fundraising in the coming year looks set to remain extremely difficult, the long term outlook is far more positive. The majority of investors are below their target allocation to real estate and 4 expect to increase their allocations to the asset class in the longer term. Asia-based investors are also more likely to be investing than those based in Europe or North America, with 71% planning new commitments in the coming year. What is also notable is the scope of their planned investments, with a large proportion Key Facts 42% of real estate investors have invested in the asset class in the last 12 months. 54% of active real estate investors will target opportunistic vehicles in the next 12 months, up from 44% in December of real estate investors plan to make new investments in the next 12 months, down from 53% in December % of investors interviewed plan to maintain or increase their allocations to the asset class in the next 12 months. 76% of investors planning new commitments will be deploying $50mn or more to private real estate funds in the next 12 months. 72% of investors interviewed either agree or strongly agree that fund managers and investors interests are properly aligned. 27

29 Preqin Investor Outlook: Alternative Assets, H Investor Activity in the Last 12 Months The proportion of investors making new private real estate commitments decreased in the last year, with smaller investors less likely to have made commitments. There were also significant regional variations, with Asia-based investors the most active and North America-based institutions the least. A smaller proportion of investors have made commitments to private real estate funds in the previous 12 months compared to those interviewed in December and August Fig. 4.1 shows that 42% of investors interviewed made private real estate fund commitments in the last 12 months, a substantial drop from both the 54% of investors that stated they had made commitments in the previous year when interviewed in August 2012 and the 49% that did so in December While these figures may suggest a decrease in investor appetite for private real estate funds, it should be noted that the 42% of respondents that have made commitments in the last 12 months is still an increase on the 34% of investors interviewed that stated the same in December With the continuing economic challenges in Europe and North America, many real estate fund managers are seeking to widen their search for capital to include Asia-based investors. Recent changes in regulations have encouraged many institutions based in Asia to shift their focus from traditional investments to alternative asset classes in order to diversify their investment portfolios. As a result, investors based in Asia were the most active in the private real estate market in the last 12 months compared to their North America- and Europe-based counterparts, with 62% committing to at least one private real estate fund (Fig. 4.2). In comparison, 41% of Europe-based investors committed to funds in the last 12 months, followed by 38% of North America-based institutions. Institutional investors with $10bn or more in assets under management were more likely to have committed to private real estate in the last 12 months, with 67% of these larger institutions being active in the private real estate market. Conversely, the majority of respondents with less than $10bn in assets under management (6) did not make a commitment to a private real estate fund in the previous 12 months. Fig. 4.1: Proportion of Investors that Committed to Private Real Estate Funds in the Previous 12 Months, December August 2013 Interested in sourcing more information on private real estate investors? Real Estate Online can help. The service contains extensive profiles of over 3,800 active investors in real estate, including known past investments, fund managers invested with and allocations to the asset class. For more information on Real Estate Online, or to find out how the service can help you, please visit: % 37% 66% 34% 46% 54% 51% 49% 58% 42% Dec-09 Dec-10 Dec-11 Aug-12 Dec-12 Aug-13 Did Not Commit in Previous 12 Months Committed in Previous 12 Months Source: Preqin Investor Interviews, December August 2013 Fig. 4.2: Proportion of Investors that Committed to Private Real Estate Funds in the Previous 12 Months by Investor Location 10 Fig. 4.3: Proportion of Investors that Committed to Private Real Estate Funds in the Previous 12 Months by Assets under Management % 8 33% % 59% 38% 41% 62% Did Not Commit in Previous 12 Months Committed in Previous 12 Months % Did Not Commit in Previous 12 Months Committed in Previous 12 Months North America Europe Asia Less than $10bn $10bn or More Investor Location Source: Preqin Investor Interviews, August 2013 Assets under Management Source: Preqin Investor Interviews, August

30 4. Real Estate Investor Activity in the Coming 12 Months Fundraising looks set to remain challenging in the coming year, with a smaller proportion of investors interviewed looking to make commitments in the next 12 months. Regionally, Asia-based institutions are again set to be the most active, and smaller investors are less likely to commit to the asset class. The proportion of investors planning to make new private real estate fund commitments in the following 12 months has decreased substantially, from 53% in December 2012 to 4 in August 2013 (Fig. 4.4). Investor appetite for new commitments varies considerably by location, with Asia-based institutions overwhelmingly set to be the most active in the next 12 months; 71% of investors based in this region are likely to make new commitments in the coming year (Fig. 4.5). In comparison, only 3 of investors based in North America and 24% of Europe-based investors are likely to commit to private real estate in the next 12 months. Concerns over the economic climate in the eurozone may have affected the appetite of Europe-based investors as well as recent regulatory changes and proposals. Fig. 4.4: Investor Intentions for Private Real Estate Investments in the Following 12 Months, December August 2013 Institutions with more than $10bn in assets under management are twice as likely to make new commitments in the coming 12 months compared to those with less than $10bn in total assets (Fig. 4.6). Smaller institutions will typically make fewer commitments and, therefore, a significant 59% are unlikely to make new real estate investments in the coming 12 months. When asked to state the key factors investors assess when seeking real estate fund managers, an established track record was the most commonly cited factor, with 32% of respondents stating it as a key attribute. Management experience and background followed, cited by 3 of investors interviewed. With a manager s track record and experience the most important factors for investors when considering new relationships, first-time fund managers are likely to continue to find the fundraising environment extremely challenging. Fig. 4.5: Investor Intentions for Private Real Estate Investments in the Next 12 Months by Investor Location % % 1 49% 6% 47% 4 53% 11% 36% 36% 48% 4 17% 7% 53% 47% 13% 4 Unlikely to Make New Commitments Undecided Likely to Make New Commitments % 9% 3 61% 1 24% 23% 71% Unlikely to Make New Commitments Undecided Likely to Make New Commitments Dec-09 Dec-10 Dec-11 Aug-12 Dec-12 Aug-13 North America Europe Asia Investor Location Source: Preqin Investor Interviews, December August 2013 Source: Preqin Investor Interviews, August 2013 Fig. 4.6: Investor Intentions for Private Real Estate Investments in the Next 12 Months by Assets under Management Fig. 4.7: Key Factors Investors Assess When Searching For Private Real Estate Fund Managers % 31% Less than $10bn 22% 14% 64% $10bn or More Unlikely to Make New Commitments Undecided Likely to Make New Commitments % Established Track Record 3 Management Experience/ Background 27% Returns 18% 18% Source of Returns/Strategy Risk Profile 14% Fees 12% Transparency of Holdings 8% Liquidity Profile Client Service Domicile Other Assets under Management Source: Preqin Investor Interviews, August 2013 Key Factors Source: Preqin Investor Interviews, August

31 Preqin Investor Outlook: Alternative Assets, H Capital Outlay A significant proportion of investors will commit more capital to private real estate over the coming year, with the majority of active institutions deploying $50mn or more. While many institutions are not planning new commitments, there remains a significant proportion of investors active in private real estate that are increasing their outlay to the asset class. Thirty percent of respondents expect to commit more capital to private real estate in the next 12 months compared to the last 12 months, and 12% expect to commit the same amount of capital in the next 12 months as they did in the 12 months to August 2013 (Fig. 4.8). However, a sizeable 19% of respondents will commit less capital to private real estate in the next 12 months, and 39% of investors interviewed that did not commit in the previous 12 months will not commit in the next 12 months; this demonstrates that fund managers are likely to have continuing difficulties in raising capital for private real estate funds going forward. Forty-one percent of investors planning to be active in the next 12 months will be committing to one real estate vehicle, while 23% plan to commit to two real estate funds (Fig. 4.9). Encouragingly, a sizeable 36% expect to make commitments to three or more funds in the next 12 months. In terms of capital, 76% of respondents will be deploying $50mn or more to private real estate funds in the next 12 months, whereas only 24% of investors will be making commitments totalling less than $50mn over this period (Fig. 4.10). While fundraising looks set to remain challenging in the coming months, it is clear there are investors that are planning to put a significant amount of capital to work in 2013 and Data Source: Preqin s Real Estate Online service contains details on over 1,700 private real estate fund managers, including past fundraising data, performance and known investors. Subscribers can also view league tables of real estate fund managers, which can be ranked by dry powder or capital raised in the last 10 years, and filtered by location. For more information on Preqin s real estate services, please visit: Fig. 4.8: Investors Expected Capital Commitment to Private Real Estate Funds in the Next 12 Months Compared to the Previous 12 Months 39% 19% 3 12% More Capital in Next 12 Months than in Last 12 Months Same Amount of Capital in Next 12 Months Less Capital in Next 12 Months than in Last 12 Months Did Not Commit in Last 12 Months and Not Committing in Next 12 Months Source: Preqin Investor Interviews, August 2013 Fig. 4.9: Investors Expected Number of Private Real Estate Fund Commitments in the Next 12 Months Fig. 4.10: Investors Expected Capital Outlay to Private Real Estate Funds in the Next 12 Months 36% 1 Fund 41% 12% 24% Less than $50mn 2 Funds 36% $50mn-$99mn 28% $100mn-$249mn 23% 3 or More Funds $250mn or More Source: Preqin Investor Interviews, August 2013 Source: Preqin Investor Interviews, August

32 4. Real Estate Strategies and Geographies Targeted Investor appetite for high-risk real estate strategies has seen a recent resurgence, with opportunistic and value added funds the most sought after in the next 12 months. Appetite for opportunistic funds has risen significantly since December Fig shows that 54% of active investors will target opportunistic vehicles in the next 12 months, up from 44% in December Value added vehicles are sought by 51% of institutions in the coming 12 months. These figures are reflective of the shift in general investor sentiment towards a return to higher risk/return profile investments. Appetite for core funds has remained stable in recent years but investor interest in coreplus, debt and distressed real estate has decreased after a peak in appetite in December Data Source: The proportion of investors based in North America and Europe that will invest in domestic markets is much higher than the proportion of Asian institutions that will allocate domestically. Sixtynine percent of North America-based investors and 79% of Europebased investors will commit to funds targeting their domestic markets, but only 44% of Asian organizations will seek domestic funds in the next 12 months. Due to changes in regulations allowing more Asia-based institutions to invest indirectly as well as internationally, a growing number of investors in the region are looking to overseas real estate in the coming year. In terms of which regions investors view as the best investment opportunities for real estate funds, North America is thought to be presenting the best opportunities by a significant 71% of respondents. Only 3 of respondents felt that Europe was presenting the best opportunities, with Asia and emerging markets outside Asia listed by 16% and 13% of investors respectively. Fig. 4.11: Strategies Targeted in the Next 12 Months by Private Real Estate Investors, December August 2013 Preqin tracks the future investment plans of investors in private real estate funds, allowing subscribers to Real Estate Online to source investors actively seeking new real estate commitments via the Fund Searches and Mandates feature. This feature contains detailed investment plans of over 450 real estate investors for the next 12 months, including strategy and regional preferences, the timeframe of their next investment and the estimated number of future investments. For more information on how Preqin s real estate services can help you, please visit: Proportion of Fund Searches % 44% 42% Opportunistic 5 51% 47% 47% 47% 4 Value Added Core 34% 23% 8% Debt 4 26% Core-Plus 2 13% Distressed Dec-11 Dec-12 Aug-13 Source: Preqin Real Estate Online Fig. 4.12: Regions Targeted in the Next 12 Months by Private Real Estate Investors 9 Fig. 4.13: Geographies Investors Believe Are Presenting the Best Opportunities in the Current Market % 7 71% Proportion of Fund Searches % 43% 39% 39% 19% 7% 36% 44% 36% 14% 39% North America- Based Investors Europe-Based Investors Asia-Based Investors % 13% North America Europe Asia Global Region Targeted Source: Preqin Real Estate Online North America Europe Asia Emerging Markets (Excluding Asia) Region Source: Preqin Investor Interviews, August

33 Preqin Investor Outlook: Alternative Assets, H s and Confidence in the Asset Class Investors remain committed to the real estate asset class in the medium to longer term, with the vast majority planning to either maintain or increase their allocations, and private real estate fund investments are either exceeding or meeting expectations for most respondents. Property remains an important part of many sophisticated investors portfolios. Eighty-seven percent of investors interviewed plan to maintain or increase their allocations to the asset class in the next 12 months, with only 13% of investors expecting to scale down their exposure to the asset class. Ninety-two percent of those interviewed expect to maintain or increase their allocations to real estate in the long term. Even more encouraging for fund managers is the finding that 4 of investors interviewed expect to increase their allocations to real estate in the longer term. The majority of investors interviewed (6) stated that the performance of their real estate fund investments had met their expectations in the last 12 months. These results could be attributed to the improving performance of real estate funds in the last couple of years; there has been a positive average change in NAV of closed-end real estate funds in each of the 11 quarters to December These results may also reflect changing attitudes of investors, which may accept more modest returns in the current environment. Twenty-five percent of those interviewed felt that their real estate investments had fallen short of their expectations. While only of investors interviewed felt that the performance of their private real estate fund investments had exceeded their expectations, this is a significant increase on the 3% of investors that stated the same when interviewed in December Real estate can perform a number of roles within an investor s portfolio, offering a range of risk/return profiles, providing diversification and steady income streams, and acting as an inflation hedge. When asked whether their confidence in real estate to achieve these objectives had changed in the last 12 months, a significant 69% of investors interviewed stated that their confidence in real estate to achieve portfolio objectives had remained unchanged in the last 12 months. Twenty-two percent of interviewees reported that they have increased confidence in their Fig. 4.15: Proportion of Investors that Feel Their Private Real Estate Fund Investments Have Lived up to Expectations over the Past 12 Months property investments to achieve portfolio objectives, compared to only 11% stating reduced confidence in the real estate asset class. Fig. 4.14: Investors Intentions for Their Real Estate s in the Next 12 Months and Longer Term Looking to source more real estate performance data? Preqin s Real Estate Online service contains performance data for over 1,100 individual private real estate funds. Subscribers can access details of the top performing funds and fund managers, as well as the latest figures for the PrEQIn Real Estate Index. For more information, or to arrange a demonstration, please visit: % 58% 13% Next 12 Months Fig. 4.16: Investors Confidence in Private Real Estate to Achieve Portfolio Objectives in the Past 12 Months 4 52% 8% Longer Term Increase Maintain Decrease Source: Preqin Investor Interviews, August Exceeded Expectations 11% Increased Confidence in Real Estate Met Expectations No Change in Confidence 6 Fallen Short of Expectations 69% Reduced Confidence in Real Estate Source: Preqin Investor Interviews, August 2013 Source: Preqin Investor Interviews, August

34 4. Real Estate Fees and Alignment of Interests With fees and other fund terms remaining a point of contention within the private real estate industry, we asked investors whether they felt that fund managers and investors interests were aligned, and which areas of real estate fund terms could most be improved. Encouragingly, Fig reveals that the overwhelming majority of investors interviewed either agree or strongly agree that fund managers and investors interests are properly aligned (72%). When investors were asked which areas could most be improved concerning fund terms, the largest proportion of respondents stated management fees as a key area for improvement (41%). Performance fees were also a key issue for investors, with a notable 59% of respondents stating that the size of fee charged and the structure utilized were areas for improvement collectively. The fund manager s commitment to the fund was a key area for improvement for 27% of investors interviewed. The general satisfaction displayed by real estate investors concerning the alignment of interests with fund managers may result from the fact that 3 of investors believe that there has Fig. 4.17: Proportion of Investors that Feel Fund Manager and Investor Interests Are Properly Aligned been a significant or slight change in the alignment of interests in favour of the investor (Fig. 4.19); conversely, only of respondents have seen a change in favour of fund managers. Although management fees remain an area for improvement for many investors, 71% of respondents stated that this was the area where they feel that terms have changed the most, with performance fees stated by a much lower 24% of investors. Subscribers to Real Estate Online can utilize a fund terms calculator to compare the average benchmark terms for different types and locations of private real estate funds, as well as individual fund terms information across various strategies, geographies and fund sizes. Fig. 4.18: Investors Views on Areas Where Alignment of Interests Can Be Improved 28% 9% Strongly Agree Agree Disagree % 32% 27% 27% 14% 14% 9% 63% Strongly Disagree Management Fees Performance Fees - Amount Manager Commitment to Fund Performance Fees - Structure Hurdle Rate Increased Transparency at Fund Level Other Source: Preqin Investor Interviews, August 2013 Fig. 4.19: Proportion of Investors that Have Seen a Change in Private Real Estate Fund Terms over the Last 12 Months Source: Preqin Investor Interviews, August 2013 Fig. 4.20: Areas in Which Investors Have Seen a Change in Private Real Estate Fund Terms over the Last 12 Months % 61% 2 Significant Change in Favour of Investor Slight Change in Favour of Investor No Change Slight Change in Favour of Fund Manager Significant Change in Favour of Fund Manager % 14% 14% 14% Management Performance Hurdle Rate Increased Manager Fees Fees Transparency Commitment at Fund Level to Fund Other Source: Preqin Investor Interviews, August 2013 Source: Preqin Investor Interviews, August

35 Preqin Investor Outlook: Alternative Assets, H Key Issues and Regulation With the private real estate market witnessing a number of incoming and proposed regulatory changes in 2013, we asked investors what they believed the key issues are in the current real estate market, and the impact that recent regulation has had on their allocations. For investors in the private real estate asset class, the economic environment continues to be the key issue affecting the market in 2013, with 42% of respondents stating that this was the most important factor, increasing from 4 in December Despite real estate demonstrating encouraging performance in recent years, performance is a key issue for 27% of investors interviewed in August 2013, increasing from in December As a result of new regulation coming into play in the first half of 2013, regulation and its impact on the private real estate market is a key issue for 1 of respondents. With the majority of investors satisfied with the alignment of interests with fund managers, as demonstrated on page 33, fees were a key issue for only of respondents. When investors were asked whether recent regulatory changes and proposals, such as AIFMD and Solvency II, had had an impact on their private real estate investments, the overwhelming majority (92%) responded that it had not caused them to make any change in their allocations to the asset class. With 92% of investors interviewed stating that they would be maintaining or increasing their allocations to real estate in the longer term, as shown on page 32, this demonstrates the confidence investors have in the asset class going forward, with recent regulation having little impact on their investments so far. Nonetheless, Fig reveals that the majority of respondents (52%) are unsure whether regulations introduced in the last three years are beneficial to the private real estate industry, indicating that the impact on respondents investments is as yet unclear, and may be felt more in the coming months. Fig. 4.21: Investors Views on the Key Issues Facing the Private Real Estate Market in 2013 Interested in details of all private real estate funds in market? Preqin s Real Estate Online service contains extensive information on all 481 closed-end private real estate funds currently seeking capital. Subscribers can access details on a fund s strategy, geographic focus, target size, key contact details and much more For more information, or to register for a demonstration, please visit: % Economic Environment 27% Performance 1 Regulations Fees 8% Volatility Transparency 4% Liquidity 1 Other Key Issues Source: Preqin Investor Interviews, August 2013 Fig. 4.22: Ways in Which Recent Regulatory Changes and Proposals Have Affected Investors Real Estate Investments Fig. 4.23: Investors Views on Whether the Regulations Introduced in 2011, 2012 and 2013 Are Beneficial to the Private Real Estate Industry 4% 3% 92% 1% Have Increased May Increase in the Future No Change May Reduce in the Future Have Reduced 52% 22% 26% Regulations Are Beneficial to the Private Real Estate Industry Regulations Are Not Beneficial to the Private Real Estate Industry Unsure Source: Preqin Investor Interviews, August 2013 Source: Preqin Investor Interviews, August

36 4. Real Estate Alternative Methods of Accessing the Asset Class Recent years have seen institutions often seeking the additional control provided by alternative routes to private real estate, such as co-investments, joint ventures, or separate accounts. Appetite for these methods has remained stable, with larger investors the most likely to target investment via alternative routes. Interest in co-investments and joint ventures has remained stable over the last few years, with appetite for real estate separate accounts increasing. Thirty-seven percent of investors are now interested in separate accounts, increasing from 33% in January 2012 and 3 in January 2013 (Fig. 4.24). However, the resources and knowledge required to make these investments means that it is typically the larger investors that will look to gain exposure through these routes. Fig shows that 67% of institutions with $10bn or more in total assets invest or consider investing via joint ventures, and 62% utilize or would consider utilizing separate accounts. In contrast, only 21% of investors with less than $1bn in assets under management invest or consider investing in joint ventures and invest or consider investing via separate accounts. Appetite for separate account structures also differs across investor types. Of the six investor types listed in Fig. 4.26, asset managers are the most likely to invest via separate accounts; 6 of such institutions utilize, or consider utilizing separate accounts to access the real estate market. Asset managers often have sophisticated investment teams and, as a result, are more able to evaluate and monitor this type of investment. Forty-three percent of public pension funds will invest, or consider investing in separate accounts. Public pension funds often have large ticket sizes and therefore separate account investments are a particularly viable option for many of these investors. Endowment plans and foundations are the least likely investor types to award separate accounts to real estate managers, with 78% and 8 of these investors unwilling to invest through this route respectively. of these investors utilizing or considering utilizing this investment method. In comparison, 26% of European investors form or consider forming real estate separate accounts. Fig. 4.24: Investor Appetite for Co-Investments, Joint Ventures and Separate Accounts, January August 2013 Proportion of Investors Receive fully customized digests of updates and news on funds and investors managed through the Preqin Alerts Centre on Real Estate Online. For more information, please visit: % 37% 3 39% 37% 38% 37% 3 33% Jan-2012 Jan-2013 Aug-2013 In terms of investor location, institutions based in North America are more likely to seek separate account relationships, with 33% Make or Consider Making Co-Investments Invest or Consider Investing in Joint Ventures Invest or Consider Investing in Separate Accounts Source: Preqin Real Estate Online Fig. 4.25: Investor Appetite for Co-Investments, Joint Ventures and Separate Accounts by Investor Size Fig. 4.26: Investor Appetite for Separate Accounts by Investor Type Proportion of Investors % 21% 33% 28% 33% 57% 67% Less than $1bn $1-10bn $10bn+ 62% Make or Consider Making Co- Investments Invest or Consider Investing in Joint Ventures Invest or Consider Investing in Separate Accounts Assets under Management Source: Preqin Real Estate Online Proportion of Investors % 16% 3 Asset Manager 3 13% 57% Public Pension Fund 11% 69% 69% Private Sector Pension Fund 11% 8% 9% Insurance Company 14% 11% 78% 8 Endowment Plan Foundation Will Invest in Separate Accounts Will Consider Investing in Separate Accounts Will Not Invest in Separate Accounts Source: Preqin Real Estate Online 35

37 Investor Network Compare. Connect. Invest. Identify and evaluate investment opportunities on Preqin Investor Network. View all funds currently raising Track fund-level past performance for managers with a fund in market Connect with fund managers Benchmark management and performance fees by fund strategy, geographic location and fund size Access valuable market analysis and performance benchmarking research Signing up to Preqin Investor Network is easy for more information please visit: Are you a fund manager? Ensure this accredited investor base has the right information on your funds. Updating your information is easy and free of charge. To find out more, please visit:

38 5. Infrastructure Infrastructure Institutional Investor Appetite Drives Growth Section Five: Infrastructure Investor appetite for infrastructure continues to increase and the asset class looks likely to experience significant growth in the coming years. In the 12 months to June 2013, $34bn was raised by infrastructure funds holding final closes, a notable increase on the $19.5bn which was raised by funds holding final closes between Q and Q With 63% of investors planning to commit more capital in the coming year that they did in the last 12 months, a further increase in the rate of fundraising seems likely. In the longer term the outlook is also very encouraging, with just 58% of investors expecting to increase their infrastructure allocations in the future, and just 2% expecting allocations to decrease. There are many investors expecting to make a sizeable capital outlay to the asset class in the coming year. Of investors planning new commitments, 48% expect to make at least three fund investments and 47% anticipate allocating at least $100mn. Unlisted funds remain the primary route to market for investors seeking infrastructure exposure, with 91% of all institutions investing the coming year targeting unlisted funds. Among the larger investors there is increased interest in investing directly, but the majority will still make a combination of fund commitments and direct investments. A key area of the infrastructure industry which remains a concern for investors is fund terms and conditions. Many investors are unhappy with private equity-like fee structures in an asset class with very different return expectations, and 49% of respondents stated that they did not believe investor and fund manager interests are properly aligned. Many fund managers have been adjusting their terms in light of investor concerns, with 69% of respondents saying they saw a change in infrastructure fund terms over the past 12 months in favour of the investor, but it is clear there is still work for fund managers to do to satisfy the investor community. Despite these concerns it is clear that many institutions believe infrastructure can play an important role in their portfolios. The congested fundraising market means raising capital for unlisted infrastructure funds is likely to remain challenging in the coming months, but encouragingly for firms on the road, the investor appetite for the infrastructure asset class is certainly there. Key Facts 63% of investors surveyed expect to commit more capital to infrastructure funds in the next 12 months than in the previous year. 94% of investors highlighted manager experience and background as a key factor when selecting infrastructure fund managers. 47% of investors expect to invest at least $100mn over the next year, with 12% planning to invest in excess of $500mn. 47% of investors agree that fund manager and investor interests are properly aligned in the current market, and 4% strongly agree. 93% of investors feel their infrastructure portfolios have either met or exceeded expectations over the past 12 months. 67% of investors are unsure whether recent regulatory changes are positive or negative for the infrastructure industry. 37

39 Preqin Investor Outlook: Alternative Assets, H Investor Activity in the Coming Year and the Longer Term Unlisted infrastructure fundraising was strong in H1 2013, with 19 vehicles reaching a final close, securing $15.4bn in aggregate institutional investor capital. This represented an 88% increase on the $8.2bn raised by infrastructure fund managers in H1 2012, showing that investor appetite for infrastructure exposure continues to grow. The infrastructure investor universe is still relatively small when compared to other alternative asset classes and many investors are inexperienced in the space. Fund manager competition for investor commitments is therefore higher than ever, with a large number of infrastructure funds on the road sourcing capital from a small investor base. As such, infrastructure fund managers must continue to pay close attention to investor attitudes and key demands in order to execute a successful fundraise in the current market. Investors Infrastructure Commitments in 2013/14 As shown in Fig. 5.1, the majority (63%) of institutional investors surveyed expect to commit more capital to private infrastructure funds in the coming 12 months than in the previous year. This is slightly higher than the 58% of surveyed investors that expected to invest more capital in the 12 months from August 2012 and is extremely positive for fund managers looking to source new investor commitments in the year ahead. Just over a quarter (27%) of investors surveyed plan to invest the same level of capital in the coming 12 months than in the past year, while just expect to invest less capital in 2013/14. Investors Infrastructure s over the Long Term A significant 58% of surveyed investors plan to increase their allocations to infrastructure over the long term, slightly less than the 62% which expected this in August Infrastructure is still a new asset class for many investors, with 81% of investors with an active infrastructure allocation having a target allocation of less than 7. of their total assets. As these institutions become more comfortable with the risk/return potential of infrastructure funds, allocations to the space are likely to rise. As illustrated in Fig. 5.2, a further 4 of survey respondents expect to maintain the same level of exposure to infrastructure over the long term, while just 2% plan to decrease their infrastructure allocations. Fig. 5.1: Investors Expected Capital Commitments to Infrastructure Funds in the Next 12 Months Compared to the Last 12 Months Fig. 5.2: Investors Intentions for Their Infrastructure s over the Long Term 27% More Capital in the Next 12 Months than in the Last 12 Months 63% Same Amount of Capital in the Next 12 Months as in the Last 12 Months 4 2% 58% Increase Maintain Less Capital in the Next 12 Months than in the Last 12 Months Decrease Source: Preqin Investor Survey, August 2013 Source: Preqin Investor Survey, August 2013 Raising Capital for an Infrastructure Fund? Preqin s Infrastructure Online features detailed profiles for more than 2,000 active infrastructure investors, with assets under management in excess of $65tn. View detailed future investment plans, including strategy and regional preferences and the estimated number of future investments. Extensive profiles also include contact information for key decision makers, allocations, previous investments, and much more. To see how Preqin can help your fundraising efforts, please visit: 38

40 5. Infrastructure Future Searches and Capital Outlay Preqin employs a dedicated team of multi-lingual analysts that is in direct contact with industry professionals at over 2,000 institutions investing in infrastructure worldwide. Through this constant communication, we are able to build a clear picture of investors investment strategies and their plans for future investment in the asset class. Capital Available to Invest Fig. 5.3 provides a breakdown of the amount of capital investors plan to invest in infrastructure opportunities over the coming 12 months. Thirty-eight percent of investors planning to make new investments in the infrastructure asset class in 2013/14 have reserved up to $50mn for such opportunities. In contrast, 47% of institutional investors expect to invest at least $100mn over the course of the next year, with 12% planning to invest $500mn or more. This shows that a sizeable proportion of investors are looking to invest a significant level of capital in the infrastructure asset class, which is very encouraging for the industry. Interestingly, 71% of those investors looking to invest $500mn or more in the coming year have a preference for direct investment strategies, showing how larger investors are becoming more interested in direct exposure to the asset class. However, 57% of those investors with a preference for direct investments will also consider investing in unlisted infrastructure vehicles, highlighting the continued importance of infrastructure fund managers to the industry. commitments to unlisted infrastructure funds. Despite the growing preference among investors for direct exposure and co-investments alongside portfolio managers, the unlisted fund route remains the predominant route to market for most institutional investors. Thirtyfive percent of investors will look to make direct investments in the coming year, while 11% will seek to invest in listed funds. Data Source: Preqin s Infrastructure Online features detailed information on the future plans of 610 infrastructure investors with active fund searches and open mandates. Fig. 5.3: Amount of Fresh Capital Institutional Investors Plan to Invest in Infrastructure over the Next 12 Months Number of Expected Investments 12% 38% Less than $50mn A significant 52% of institutional investors that expect to be active in the coming year plan to make one or two new infrastructure investments, and a further 38% plan to make between three and four new investments (Fig. 5.4). Ten percent of investors aim to make at least five new infrastructure investments in the coming year. 3 1 $50-99mn $ mn $ mn $500mn or More Preferred Routes to Market As shown in Fig. 5.5, 91% of investors looking to make new investments in the next 12 months expect to do so through Fig. 5.4: Number of Infrastructure Investments Institutional Investors Plan to Make over the Next 12 Months Source: Preqin Infrastructure Online Fig. 5.5: Preferred Route to Market of Investors Searching for New Infrastructure Investments in the Next 12 Months % 8% 2% 8 38% 52% 1-2 Investments 3-4 Investments 5-6 Investments 7+ Investments Proportion of Investors % Unlisted Funds Direct Investment Listed Funds Source: Preqin Infrastructure Online Source: Preqin Infrastructure Online 39

41 Preqin Investor Outlook: Alternative Assets, H Satisfaction with Returns We asked investors if the returns generated by their infrastructure investments had lived up to expectations and how their confidence in infrastructure to achieve their portfolio objectives has changed. A significant 93% of investors surveyed feel their infrastructure portfolios have either met or exceeded expectations over the past 12 months. This demonstrates that infrastructure investments have largely performed positively despite uncertain economic conditions, and have contributed well to overall portfolio performance. Sixty-four percent of surveyed investors stated that their infrastructure investments had met expectations and a further 29% felt their returns exceeded expectations, as displayed in Fig In total, this is a healthy improvement on the 81% of investors surveyed that felt their infrastructure portfolios had met or exceeded expectations in August However, it is important to recognize that 7% of investors feel their infrastructure portfolios did not meet expectations. Investor Confidence in Infrastructure The risk/return profile of the infrastructure asset class is quite diverse depending on the type of fund and chosen strategy. Some investors commit to infrastructure funds as an extension of their return-seeking private equity portfolio, while others are looking for lower longer-term yields. We asked investors whether their confidence in infrastructure to achieve portfolio objectives had changed over the past 12 months; a significant 74% of investors surveyed reported no change and remained largely positive towards the infrastructure space, as shown in Fig Thirteen percent of investors felt their confidence had increased. A further 13% reported a decrease in confidence. One Belgiumbased investment company that reported a decrease in confidence stated that: the regulator is much more unstable and untrustworthy, and considered infrastructure funds too expensive and managers too greedy. In terms of investors general perception of the infrastructure industry, 46% of surveyed investors are positive, while a further 46% have a neutral outlook, as Fig. 5.8 illustrates. Of those positive respondents, one Germany-based asset manager stated that their outlook was in general positive, but added that fundraising is very active and a lot of money is coming into the market, so we are afraid about too much money increasing valuations and declining returns. Another US-based public pension fund voiced similar views, stating that they had a positive perception of infrastructure but were concerned about the amount of capital chasing a fairly limited number of deals, especially at the higher end of transaction size. Despite general positivity towards infrastructure, questions still remain over issues such as expected deal flow and the impact of asset valuations on returns. Fig. 5.6: Proportion of Investors that Feel Their Infrastructure Fund Investments Have Lived up to Expectations over the Past 12 Months 64% 7% 29% Exceeded Expectations Met Expectations Fallen Short of Expectations Source: Preqin Investor Survey, August 2013 Fig. 5.7: Investors Confidence in Infrastructure to Achieve Portfolio Objectives Fig. 5.8: Investors General Perception of the Infrastructure Industry at Present 13% 13% Increased Confidence in Infrastructure 8% 46% Positive No Change in Confidence 46% Neutral 74% Decreased Confidence in Infrastructure Negative Source: Preqin Investor Survey, August 2013 Source: Preqin Investor Survey, August

42 5. Infrastructure Manager Selection and Key Issues Facing the Industry Investors are now considerably more cautious when making new commitments to unlisted infrastructure funds and are generally more selective when sourcing new fund manager relationships. We asked investors about the key factors they assess when looking for infrastructure fund managers and what they think are the key issues facing the infrastructure industry in 2013/14. Fund Manager Selection As shown in Fig. 5.9, a significant 94% of investors surveyed highlighted manager experience and background as a key factor when selecting infrastructure fund managers. Similarly, 87% of respondents look for fund managers with an established track record in the infrastructure space. However, because the infrastructure asset class is still relatively young, few fund managers are able to illustrate a strong history and track record in the sector. As a result, investors are fairly limited in terms of the infrastructure fund managers which meet their experience criteria, with 66 of the 146 infrastructure funds currently on the road managed by less experienced first-time teams. Other key issues highlighted by investors surveyed include the source of returns/strategy (77%), fees (72%) and returns (68%). Fifty-seven percent of investors surveyed consider the risk profile of the fund manager when seeking to form new relationships, while 5 look for greater transparency of fund manager holdings. Thirteen percent of respondents cited other factors, with several highlighting the need for co-investment rights when forging new fund manager relationships. Fig. 5.9: Key Factors that Investors Assess when Looking for an Infrastructure Fund Manager Key Issues In terms of the key issues facing the infrastructure industry in the next 12 months, 6 of surveyed investors foresee impending regulations to be an important factor. Many investors remain uncertain about what impact new regulations such as Basel III and Solvency II will have on their portfolios, something which may become clearer in the coming year. As shown in Fig. 5.10, other important issues include fund performance (54%) and the economic environment (54%), while 5 of respondents are concerned about the fees charged by fund managers. Deal flow and the amount of capital entering the asset class were named by some of the investors responding to the survey. One UK-based pension fund stated that there may be too much capital chasing too few opportunities that are materializing. Other investors are concerned that the increasing interest in infrastructure investment is driving up asset valuations and compressing potential returns. Fig. 5.10: Investors Views on the Key Issues Facing the Infrastructure Industry in 2013/ % Management Experience/Background 87% Established Track Record 77% Source of Returns/Strategy 72% Fees 68% Returns 57% 5 Risk Profile Key Factor Transparency of Holdings 4 Client Service 3 Liquidity Profile 21% Domicile 13% Other Source: Preqin Investor Survey, August Regulation 54% 54% Economic Environment Performance 5 Fees 28% Transparency 26% 26% Correlation Volatility Liquidity 11% Consolidation Other Key Issue Source: Preqin Investor Survey, August 2013 Preqin s Infrastructure Online features detailed profiles for more than 380 infrastructure fund managers from around the world, featuring key contacts, funds raised and in market, fund performance and completed transactions. Carry out advanced searches to filter fund managers by strategy, sector and project stage focus or location. Search for managers based on their past deal history. For more information, please visit: 41

43 Preqin Investor Outlook: Alternative Assets, H Fees and Alignment of Interests The fees charged by unlisted infrastructure fund managers remain a point of contention within the industry, but there are signs that fees are becoming more investor-friendly and a growing proportion of institutions are confident that investor and manager interests are appropriately aligned. Alignment of Interests Fifty-one percent of investors surveyed feel that fund managers and investors interests are properly aligned, demonstrating that although investors are becoming increasingly satisfied with their fund manager relationships, more needs to be done to improve relations. In such a competitive fundraising market, fund managers that look to improve their relations with investors, increase their chances of securing investor capital. As shown in Fig. 5.11, 47% of investors surveyed agree that fund manager and investor interests are properly aligned in the current market, and 4% strongly agree. In contrast, 4 of respondents disagree that fund manager and investor interests are properly aligned, and a further 4% strongly disagree. The proportion of investors that feel fund manager and investor interests are properly aligned has increased considerably since June 2010, when just 27% of investors surveyed believed this. However, the proportion is at a similar level to May 2011, when 49% of respondents agreed that interests were properly aligned. This illustrates that although improvements have been made, almost half of surveyed investors still feel that interests are not properly aligned and more work needs to be done to build fund manager and investor relations. As shown in Fig. 5.12, a significant 73% of investors surveyed suggested that the level of management fee charged by fund managers is a key issue, while 7 feel that the structure of performance fees can be improved. One US-based pension fund stated that there is room for infrastructure to adopt more of a core real estate fund type pricing model adding that many infrastructure managers are still trying to adopt a private equity-like 2 and 20 structure, which is not realistic given the expected returns of infrastructure. The performance fees paid to infrastructure fund managers and the size of the fund manager commitment to their own funds are key areas viewed as in need of improvement for 43% of respondents each, while 41% believe there are issues surrounding hurdle rates that need to be addressed. One North America-based pension fund believed that a more flexible fund life would be a key area for improvement, as a client should select if they want more or less liquidity. Fees As demonstrated in Fig. 5.13, a significant 69% of investors surveyed saw a change in infrastructure fund terms over the past 12 months in favour of the investor. This coincides with an improvement in the proportion of investors that feel that fund manager and investor relations have become more aligned. Just 2% of respondents saw a change in favour of fund managers, which reflects the efforts being made by many fund managers to address the concerns of investors regarding fund terms. Twentynine percent of investors surveyed reported seeing no change in fund terms over the past 12 months. Despite the majority of investors surveyed suggesting that more needs to be done with management fees to improve fund manager and investor alignment (Fig. 5.12), a significant 76% of respondents recognize that there has been a change in management fees over the past 12 months, as shown in Fig Investors are now largely unwilling to buy into the traditional 2 and 20 private equity fee structure when gaining exposure to lower risk/ return profile infrastructure assets, and fund managers are clearly making concessions in this area to attract investor commitments. The private equity fee model may be suited to higher risk/return Fig. 5.11: Proportion of Investors that Feel Manager and Investor Interests Are Properly Aligned Fig. 5.12: Investors Views on Areas Where Alignment of Interests Can Be Improved 4 4% 4% 47% Strongly Agree Agree Disagree Strongly Disagree % Management Fees 7 Performance Fees - Structure 43% 43% Manager Commitment to Fund Performance Fees - Amount Paid 41% Hurdle Rate 24% Increased Transparency at Fund Level 8% Redemption Fees More Favourable Redemption Frequency 3% Reducing Lock-up Period 8% Other Source: Preqin Investor Survey, August 2013 Source: Preqin Investor Survey, August

44 5. Infrastructure infrastructure strategies, but most infrastructure investors are looking for fees to reflect the types of assets being invested in and the levels of return expected. Thirty-three percent of investors surveyed have seen an improvement in the structure of performance fees charged, although again a considerable proportion of respondents still feel this is an area in need of improvement (Fig. 5.12). Other areas that have seen improvement over the past 12 months include the amount of performance fees paid to managers, hurdle rates, fund managers commitments to their funds and fund-level transparency. Data Source: Subscribers to Infrastructure Online can utilize a fund terms calculator to compare the average benchmark terms for unlisted infrastructure funds by size and geographic focus, as well as individual fund terms for over 100 unlisted infrastructure funds. Not yet a subscriber? For more information, please visit: Fig. 5.13: Proportion of Investors that Have Seen a Change in Infrastructure Fund Terms Over the Last 12 Months Fig. 5.14: Areas in Which Investors Have Seen a Change in Infrastructure Fund Terms Over the Last 12 Months 8 76% 29% 2% 64% Significant Change in Favour of Investor Slight Change in Favour of Investor No Change Slight Change in Favour of Fund Manager Significant Change in Favour of Fund Manager Management Fees 33% Performance Fees - Structure 24% 24% 24% 24% Hurdle Rate Increased Transparency at Fund Level Manager Commitment to Fund Performance Fees - Amount Paid 6% More Favourable Redemption Frequency 3% Reducing Lock-up Period Redemption Fees 6% Other Source: Preqin Investor Survey, August 2013 Source: Preqin Investor Survey, August 2013 How can Preqin s infrastructure data help you? Identify relevant investors by fi ltering comprehensive profi les of over 2,000 infrastructure investors. Be the first to know about investors seeking new infrastructure funds now. View profi les for over 700 infrastructure funds, and individual performance for over 140 vehicles. Access details on which fund managers are bidding for, buying or selling infrastructure assets. Preqin s Infrastructure Online is the leading source of intelligence on the unlisted infrastructure fund industry, and is constantly updated by our dedicated team of multi-lingual analysts. For more information or to register for a demonstration, please visit:

45 Preqin Investor Outlook: Alternative Assets, H Impact of Regulation Impending regulations such as the AIFMD, Basel III and Solvency II will have an impact on private infrastructure investment activity, although many fund managers and investors alike remain unsure as to how these regulations will affect their investment policies. We asked investors about how they expect these regulations to affect them and whether these changes will be good or bad for the infrastructure industry. As shown in Fig. 5.15, a significant 8 of investors surveyed have not made any changes to their infrastructure investment strategy in light of impending regulatory changes. This is perhaps a reflection of the fact that many investors do not yet fully understand how these regulations will apply to them, but also because certain regulations will only apply to investors of a certain type (such as banks and insurance companies). Seven percent of respondents have already increased their infrastructure allocations as a result of these changes, while 4% may look to increase their allocations in future. None of the investors surveyed have already decreased their allocations, although 9% may look to reduce their exposure in future. changes could be favourable, particularly for institutional investors looking at alternative ways to enter the market. One Australiabased investment company stated that the retreat of the banking sector from infrastructure lending because of Basel III creates the opportunity for astute infrastructure investors to increase portfolio stability by adding debt into the infrastructure portfolio. A further 1 of investors believe these regulations will have a negative impact on the infrastructure industry, particularly for banks and insurance companies active in the space. A significant 67% of investors surveyed are unsure whether these regulation changes are positive or negative for the infrastructure industry, as illustrated in Fig However, 18% believe the Fig. 5.15: Ways Recent Regulatory Changes and Proposals Have Affected Investors Infrastructure Investments Fig. 5.16: Investors Views on Whether Recent Regulations Are Beneficial to the Unlisted Infrastructure Industry 9% 7% 4% Have Increased May Increase in the Future No Change 1 18% Regulations Are Beneficial to the Unlisted Infrastructure Industry Unsure 8 Have Already Reduced May Reduce in the Future 67% Regulations Are Not Beneficial to the Unlisted Infrastructure Industry Source: Preqin Investor Survey, August 2013 Source: Preqin Investor Survey, August 2013 Data Source: Preqin s Infrastructure Online contains detailed profiles for over 2,000 active infrastructure investors worldwide. Preqin s dedicated team of research analysts is in regular direct contact with all active investors, allowing us to provide detailed information on investors current fund searches and open mandates. Profiles also include assets under management, current and target allocations, typical investment sizes, fund type and geographic references, as well as key contact information and much more. Infrastructure Online is the leading source of intelligence for the unlisted infrastructure fund industry, constantly updated to include details of all aspects of the asset class, including individual fund performance, fundraising information, fund manager profiles, institutional investor profiles and much more. For more information, please visit: 44

46 Preqin Investor Outlook: Alternative Assets H alternative assets. intelligent data. Preqin: Alternatives Data and Intelligence If you want any further information, or would like to apply for a demo of our products, please contact us: With global coverage and detailed information on all aspects of alternative assets, Preqin s industry-leading online services keep you up to date on all the latest developments in the private equity, hedge fund, real estate and infrastructure industries. Source new investors for funds and co-investments Find the most relevant investors, with access to detailed profi les for over 7,800 institutional investors actively investing in alternatives, including current fund searches and mandates, direct contact information and sample investments. Identify potential fund investment opportunities View in-depth profi les for over 1,900 private equity, real estate and infrastructure funds currently in the market and over 10,000 hedge funds open to new investment, including information on investment strategy, geographic focus, key fund data, service providers used and sample investors. Find active fund managers in alternatives Search for fi rms active in alternative investments. View information on key contacts, fi rm fundraising/aum and performance history, key investment preferences, known investors, and more. See the latest on buyout, venture capital and infrastructure deals and exits View details of more than 80,000 buyout, venture capital and infrastructure deals, including deal value, buyers, sellers, debt fi nancing providers, fi nancial and legal advisors, exit details and more. Identify forthcoming exits and expected IPOs. Benchmark performance Identify which fund managers have the best track records, with customizable fund performance benchmarks and performance details for over 12,800 individual named private equity, real estate, infrastructure and hedge funds. Examine fund terms See the typical terms offered by funds of particular types, strategies and geographical foci, and assess the implications of making changes to different fees. View detailed profiles of service providers Search for active administrators, custodians, prime brokers, placement agents, auditors and law fi rms by type and location of funds and managers serviced. Customize league tables of service providers by type, location of headquarters, and total known number of funds serviced. New York: One Grand Central Place 60 E 42nd Street Suite 2544, New York NY Tel: Fax: London: Equitable House 47 King William Street London EC4R 9AF Tel: +44 (0) Fax: +44 (0) Singapore: One Finlayson Green, #11-02 Singapore Tel: Fax: San Francisco: 580 California Street Suite 1638, San Francisco CA Tel: Fax: info@preqin.com Web: Find out how Preqin s range of products and services can help you:

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