Table of Contents

Overview 1
Catalyst 1
Summary 1
Methodology 2
Executive Summary 3
Institutional investors are the largest customer segment for European private equity funds, but important shifts in the market are occurring 3
Special feature: The threat of sovereign wealth funds 3
The European private equity fund market is now primarily focused on institutional investors except in the UK where high net worth investors are the main client group 3
Institutional investors are particularly concerned about the liquidity of private equity funds in the current market 3
High net worth investors are seeking risk diversification but their demand is being held back by a lack of product understanding 4
The lack of liquidity of private equity funds may be a problem for mass market investors 4
Table of Contents 5
Table of figures 6
SPECIAL FEATURE: THE THREAT OF SOVEREIGN WEALTH FUNDS 8
Sovereign wealth funds are significant in number, assets under management, and influence 9
The Abu Dhabi Investment Council is by far the biggest SWF 10
SWFs are growing at a significant rate 10
SWFs are becoming increasingly aggressive in their investment strategies 11
The growth of SWFs means they are increasingly looking for the same investment opportunities as other traditional funds 11
Sovereign wealth funds are here to stay 11
The threat of SWFs is based on fears about national sovereignty being undermined 11
The management of SWFs is often professional with varying degrees of transparency 12
The activities of SWFs have implications for global financial markets 12
SWFs have helped to restore economic stability 13
A light regulatory framework could forge a partnership between SWFs and host country private equity funds 13
National and international regulation of foreign investment exists and a transnational code of practice is being introduced 13
Because of their significance, sovereign wealth funds are winning out 14
The activities of SWFs have implications for global financial markets 14
After an initial rivalry, private equity investors and SWFs have forged a partnership which provides protection for both 15
Home country private equity investors are losing out on some key private equity projects 15
Market Context 17
Institutional investors are the largest customer segment for European private equity funds, but important shifts are occurring 17
French mass market investors are increasing in importance while HNWs are decreasing, but institutional investors dominate the private equity market 18
Strong knowledge and the desire to diversify risk account for institutional investors' dominance in France 18
Despite regulatory barriers and limited liquidity, institutional investors will become an increasingly dominant customer base for private equity 18
The importance of the French HNW customer base for private equity is decreasing in favour of institutional investors 20
Product expense is a barrier for HNWs in France 21
Data tables 21
Italian HNW investors decreased in importance while institutional investors increased, but this will reverse in the next three years 24
HNWs have reacted badly to the economic downturn 24
Expenses hinder Italian HNW investors' further take-up of private equity 24
Italian institutions are cautious investors 25
German mass market investors became the largest client base for private equity funds among some asset managers for the first time in 2008, but institutional clients are still the dominant client base overall 26
Mass market investors are now the dominant customer base for private equity among 15% of German asset managers but there is concern that the mass market has insufficient understanding of the product 26
Downside protection is motivating institutional clients to take up private equity, but there is a concern about risk 27
Spanish institutional investors dominate the private equity fund market there while HNWs are decreasing in importance 27
Limited liquidity is hindering further take-up by institutions 27
Tax changes in 2007 eased the burden for private equity investors 28
Limited liquidity also bothers HNW and mass market investors in Spain, though media coverage of current economic troubles is reducing demand as well 28
HNWs became the most important customer base for private equity funds in the UK in 2008, while lack of selling expertise is hindering mass market take-up there 28
HNWs overtook institutional investors as the dominant client base in 2008 28
Education is the key to wider take-up 29
Advisor expertise is slowing up mass market investment in private equity in the UK 29
Mass market and HNW investors will become more important customer bases for private equity funds across Europe in the next three years 31
German mass market investors will not be put off by media hype to the same extent as other countries' mass market investors 31
Mass market investors are expected to be the largest customer base for private equity funds among 20% of asset managers in three years 31
Private equity management fees are a concern 32
The Italian HNW customer base will increase in importance within three years 34
Spain will see a slight increase in the importance of mass market investors in private equity funds 34
British mass market investors will continue to increase in importance for private equity funds in the next three years 36
Institutional investors in France will increase in importance for private equity fund providers 38
High product knowledge will drive the institutional market further 38
Distribution Dynamics 40
Reaching the mass market for private equity funds 40
Across Europe mass market investors are seeking diversification in their portfolios 40
French and Italian mass market investors are deterred by the expense and risk of private equity funds 42
Asset managers can best reach French mass market investors directly or through the retail banks 42
The German retail banks offer the best route to mass market investors there 43
Financial advisors in Italy and Spain are the best way to sell to mass market investors in those countries 45
Retail banks are one of the strongest ways to sell private equity funds to mass market investors in the UK 45
Reaching the high net worth market for private equity funds 46
In Germany, Italy, Spain and the UK, HNW investors are looking to diversify their portfolios 46
But in France downside protection is also an important motivator for HNW investment in private equity 47
Private equity managers and their marketing teams need to undertake an education promotional campaign 47
The key to boosting demand in France centres around communication about strategy and challenging tax/regulatory issues while in Spain confronting the limited liquidity of private equity is important 49
The German and UK markets require education about the benefits of private equity for risk diversification 50
Individual portfolio reviews should be offered to HNW clients in Italy 50
Reaching the institutional market for private equity funds 53
Institutions across Europe invest in private equity to diversify their portfolios 53
Liquidity, regulatory issues, risk and product knowledge are the key concerns for would-be institutional investors 54
An enhanced information and portfolio review service will help to sustain confidence among institutional investors 54
Asset managers in individual countries favour different distribution channels to reach potential institutional clients 56
APPENDIX 60
Definitions 60
Arbitrage 60
CAGR 60
Derivative 60
Fund of hedge funds 60
Fund supermarket 60
Hedge fund 60
HNW 60
IFA 60
Leveraged Buyout (LBO) 61
Liquid assets 61
Mass affluent 61
OEICs 61
Private Equity 61
Private Equity Funds 61
Selling short 62
Ultra HNW 62
Unit trusts 62
Venture Capital Funds 62
Methodology 62
Bibliography 63
Further reading 63
Ask the analyst 64
Datamonitor consulting 64
Disclaimer 64
List of Tables
Table 1: Which is your biggest customer group for private equity/ venture capital investments today? 18
Table 2: What do you think will be the major barrier to wider take-up of private equity/venture capital investments by institutional investors over the next year? 20
Table 3: To what extent do you agree that there is likely to be a significant economic downturn in Europe in 2008? 22
Table 4: To what extent do you agree that investors will be more cautious about investing over the next 2 years because of current conditions and their memory of the 2000-2003 downturn? 22
Table 5: To what extent do you agree that media coverage of current economic conditions is pushing customers into capital protected products? 23
Table 6: To what extent do you agree that media coverage of current economic conditions is reducing demand for private equity investments? 23
Table 7: What do you think will be the major barrier to wider take up of private equity funds by high net worth investors over the next year? 26
Table 8: What do you think will be the major barrier to wider take-up of private equity/venture capital funds by mass market investors over the next year? 31
Table 9: Which will be your biggest customer group for private equity/ venture capital investments in three years time compared with which is your biggest customer group now? 33
Table 10: To what extent do you agree that media coverage of current economic conditions is pushing customers into capital protected products? 35
Table 11: What type of organization do you work for? Q4 2007 37
Table 12: What is the average case size of business you deal with? 38
Table 13: In your opinion, what is the most important reason why mass market investors are demanding private equity and venture capital funds today? 42
Table 14: What do you think is the best way for private equity funds to be distributed to mass market investors? 44
Table 15: What is the most important reason why high net worth investors are demanding private equity and venture capital funds today? 47
Table 16: Facing the possibility of a global economic slowdown, which of the following strategies will be most effective in sustaining demand for alternative investments among your high net worth clients or the wealth managers who advise them? 49
Table 17: What do you think is the best way for private equity to be distributed to high net worth investors? 52
Table 18: What is the most important reasons why institutional clients are demanding private equity investments today? 54
Table 19: Facing the possibility of economic slowdown, which of the following strategies will be most effective in sustaining institutional demand for private equity investments among your clients or the wealth managers who advise them? 56
Table 20: What do you think is the best way for the private equity funds to be distributed to institutional investors? 58
List of Figures
Figure 1: Sovereign wealth funds are commodity or non-commodity based 9
Figure 2: The Abu Dhabi Investment Council dwarfs other sovereign wealth funds 10
Figure 3: Institutional investors dominate the European private equity investment market except in the UK 17
Figure 4: The limited liquidity of private equity investment is a key barrier to its wider take-up by institutional investors 19
Figure 5: Private equity fund managers are concerned that potential HNW investors lack a good understanding of this asset class 25
Figure 6: The risk of private equity/venture capital funds is limiting mass market demand 30
Figure 7: Over the next three years, there will be notable growth in mass market demand for private equity investment 33
Figure 8: Private equity funds will face more competition from capital-protected and structured products 35
Figure 9: The IFA industry is characterized principally by case sizes of less than £5,000 37
Figure 10: Private equity funds offer mass market investors the opportunity to diversify risk 41
Figure 11: Mass market investors are best targeted through financial advisors 44
Figure 12: Risk diversification is the primary driver of demand among HNW investors 46
Figure 13: Fund managers need to work harder to promote their offerings and investment strategies 48
Figure 14: Preferred distribution channels for HNWs vary among countries 51
Figure 15: Institutional investors in Europe are looking for portfolio diversification 53
Figure 16: Providers and distributors would do well to keep institutional clients informed about investment strategies and portfolio performance 55
Figure 17: Providers are divided over the best distribution channel to reach institutional investors 57