03 December 2009
Concerns about inadequate GP reporting, conflicts of interest, and fund terms and conditions will lead over three quarters of investors to refuse commitments to new funds from their current managers in 2010, according to Coller Capital’s latest Global Private Equity Barometer.
79% of LPs will refuse re-ups in 2010 because of fund terms and conditions (vs 57% in the Winter 2008-09 Barometer); 76% will do so because of inadequate GP transparency (vs 39% in 2008-09); and 76% will do so because of perceived conflicts of interest (vs 51% in 2008-09).
LPs’ medium-term return expectations have fallen sharply in the last year: the proportion of investors expecting annual net returns of 16%+ over the next 3-5 years has fallen to 29% (from 43% in last Winter’s Barometer). Many LPs report that the poor performance of private equity during the downturn has damaged perceptions of the asset class within their own organisations. In Europe and Asia in particular, half of investors say internal perceptions have been damaged; in North America 28% of investors say the same.
Two thirds of LPs have also changed the way they manage private equity as a result of the downturn: 60% of these LPs say they have changed their risk appetite and investment criteria; around half have deepened their due diligence prior to committing to a fund; and another half have demanded improved reporting from their GPs. 40% of LPs have also strengthened their in-house teams.
Commenting on the Barometer’s findings, Jeremy Coller, CIO of Coller Capital, said: “For many private equity investors it’s a case of ‘once bitten, twice shy’. The growth of private equity as an asset class is inevitable in the long-term, but we should understand that for many LPs, now, private equity is a harder sell internally, and for all LPs, GPs now have more to prove. We should remember, though, that in terms of total capital raised the private equity industry is barely 15 years old. When we look back in a few years, I think we’ll see today’s upheavals as a significant moment in the maturing of the industry.”
Outlook and opportunity
Over three quarters of investors expect a significant increase in capital calls during 2010 – especially North American LPs, 84% of whom expect to see a big uptick in GP drawdowns in the next 12 months. And investors expect this money to be put to good use – 85% of LPs think 2010 will be a good or great vintage.
Two thirds of investors also expect distributions to improve during 2010 – a big turnaround since the summer, when 74% expected distributions to slow. However, most investors (67%) think the improvement in the exit environment will be slight – only one quarter of LPs think there will be a significant improvement in the next two years.
LPs see buyout transactions of less than $1bn in North America and Europe as offering the best private equity investment opportunity, followed by growth capital deals in the Asia-Pacific region. Generally, the best source of good transactions is expected to be GPs buying businesses out of bankruptcy or Chapter 11, and corporations divesting divisions.
LPs are far more positive about the near-term prospects for North American venture capital deals (52% of LPs see these as good), compared with the outlook for venture deals in Europe and Asia.
The Barometer shows how much investor views of the secondaries market have changed in the last couple of years. LPs today see secondaries as an important tool for changing the overall composition and liquidity profile of their portfolios – 92% of LPs now cite the need for liquidity as a reason for investors to sell in the secondaries market (compared with 27% in 2007), and 82% now identify the need to re-balance private equity portfolios (compared with just 39% in 2007).
Most investors (67%) do not expect to tighten restrictions on placement agents in the wake of recent scandals in the industry, suggesting they think they have adequate protections already in place. About 1 in 7 LPs expect to increase their controls on placement agents, even if no new regulation in that area is forthcoming.