Because limited partners generally commit to a private equity or real estate fund for 10+ years, they need to be sure that the team that has historically generated returns at an investment manager sticks around. Turnover of key executives can quickly erode the team that limited partners signed up with.
In recent years, limited partners have come to pay closer attention to manager fees that can significantly impact the returns that investors ultimately see. In addition, investors and regulators have begun to pay greater attention to not just the posted management fees and carried interest, but also to deal fees and affiliate fees charged to funds that limited partners ultimately bear.
The highly politicized environment in which many institutional limited partners, including pension funds, sovereign wealth funds, university endowments, and foundations operate means they have to be attentive to headline risk created by investment managers or the portfolio companies or assets they invest in.
Investors in private equity and real estate expect that their fortunes and those of investment managers will be shared – i.e. that investment managers will be rewarded when investors see returns and that managers will have material skin in the game should those returns not materialize.
Given the significant uptick in income inequality in the United States and around much of the world in recent decades, the decisions investment managers make regarding labor/ employee issues can be key to mitigating risk.
As the number of private equity and real estate funds in market and total capital sought begins to approach pre-crisis, investors know that not all fund managers are created equal in terms of performance.
Since the global financial crisis of 2008, private equity and real estate managers in the US and Europe have faced an expanding regulatory regime. Compliance with Dodd-Frank regulations in the US, the AIFMD in Europe, and other regulatory regimes has become increasingly important for investment managers.