Private equity GPs feel the heat as competitors emerge, survey shows

An increase in competitors has had a big operational impact on private equity GPs and smaller sponsors across asset classes, according to a new survey from industry software provider Allvue seen exclusively by Private Funds CFO.

Thirty-one percent of private equity GPs said more entrants into the space, yielding higher competition, represented their biggest operational challenge.

Forty-one percent of mid-size GPs (those with assets under management of $2.5 billion to $10 billion) across a range of asset classes, said the same, and 27 percent of all respondents with AUM below $2.5 billion agreed. Competition was less of a challenge for most large GPs (AUM above $10 billion), with 23 percent ranking it highest.

The survey of 100 respondents was shared exclusively with Private Funds CFO and was conducted last month at the SALT iConnections New York gathering.

Survey respondents included hedge funds (48 percent), venture capital funds (15 percent), private debt (14 percent), private equity (13 percent) and traditional asset fund managers (9 percent). Half of all respondents have AUMs under $500 million.

Yuriy Shterk, Allvue’s chief product officer, tells PFCFO that the rise in competition has been driven both by growing popularity amid once niche asset classes, as well as by established GPs branching out into different asset classes. More than a decade of low interest rates increased competition in many sectors, causing investors to seek out new places to find yield.

“Nowadays we see a lot more private equity firms that are starting their own debt funds,” Shterk notes. He adds that some “traditional public credit firms” have been jumping into private debt.

And the diversification plays of older, more established GPs has been a bigger competitive driver than the entry of new competitors, Shterk says.

Shterk predicts a mixed picture for GP competition moving forward. He says that mergers and acquisitions will take out some GPs, while upcoming economic challenges will lead to growth in distressed debt and special situations.

Other operational challenges

The second-biggest operational challenge for private equity respondents is retaining talent, according to the survey (23 percent of private equity respondents to the survey). Perhaps surprisingly, no mid-size respondents from any asset class named it as their biggest challenge.

Managing data of portfolio companies and investments, along with recessionary fears and market volatility, tied for third among private equity GPs’ biggest challenges, at 15 percent each.

Twenty-three percent of small GPs and 17 percent of mid-size respondents (across all asset types) said they feared a recession more than anything else.

Pressure to expand into other asset classes and LP allocation demand were the least-named challenges among private equity GPs, at just eight percent each. But 25 percent of mid-sized managers across asset classes ranked LP demands highest, and 17 percent felt pressure to expand was most pressing.