VIDEO: Marcus Simpson of QIC

"You are seeing a whole bifurcation of the investor community. Some of the Canadian LPs have scaled back or wholly exited the fund investment part of what they used to do and are now focused on direct deals. Others have a more hybrid approach," Simpson said.

QIC, an Australia-based investment manager owned by the Queensland government, is a case in point. Its global private equity program started in 2005 and the first co-investment came two years later. But having done just two co-investments before the financial crisis, QIC has completed 15 deals in the six years subsequent to it. Simpson describes the strategy as forming close partnerships with a select group of managers and focusing more on middle-market and growth transactions.

Even among US public pension funds that have passive mandates and rely heavily on advisors, there is change. "One of the big Californian funds recently released data on its co-investment portfolio and it has done very well for them. So some pension funds are able to go back to their boards and say, ‘So far, so good, give us more capital or more leeway in terms of what we can do in this more direct universe,'" Simpson adds.

This evolution is a product of the fragmentation of a previously cohesive private equity universe comprising private companies, LPs and managers, with the likes of gatekeepers, advisors and fund-of-funds working in and around them. While some GPs are still able to raise capital under the traditional 2% management fee, 20% carried interest structure, others can't raise funds at all or they must accommodate LPs' desire for direct exposure at lower cost through separate accounts and co-investment.

Simpson notes that LPs also have the luxury of greater choice: the GP universe has expanded from an estimated 2,000 managers in the early 2000s to around 6,000 today.

There are numerous ways in which private equity firms can address investors' needs, from separate accounts to offering a sliding scale on fees for large commitments to funds. Managers are operating in an increasingly customized universe and, while the direct investment element remains small and led by a handful of Canadian pension funds and Asian state-linked institutions, it will become ever more prevalent.

"You have seen a fairly small proportion of investors that have internal direct teams, or the teams or capabilities are outsourced to advisors, co-investing in transactions or doing their own transactions. This is something we haven't seen on this scale since before the global financial crisis," Simpson says.

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