18 January 2011
LPs TO REDUCE EXPOSURE TO FUNDS-OF-FUNDS AND DIVERSIFY GP RELATIONSHIPS
Record numbers of investors are rejecting GP requests for re-investment
Half of pension fund LPs believe staffing restrictions are damaging their PE returns
Early-stage companies are starved of VC funding in Europe and Asia-Pacific, LPs say
Only European LPs consider ESG issues an important investment criterion
Private equity investors’ (LPs’) total exposure to funds-of-funds will fall over the next 3 years, according to Coller Capital’s latest Global Private Equity Barometer. High costs are cited by half of investors planning a reduced funds-of-funds exposure, and disappointing returns are cited by one third (36%).
The number of investors refusing to commit to new funds from their current GPs has also reached a record high. 91% of European investors have increased their ‘re-up’ refusals compared with just 63% two years ago, while the proportion of Asia-Pacific LPs refusing re-ups has also grown (from 52% two years ago to 70% now).
However, reduced funds-of-funds usage and more ‘re-up’ refusals do not mean LPs are becoming less adventurous – four fifths (81%) of LPs plan to add new GP relationships over the next 2-3 years.
Commenting on the Barometer's findings, Jeremy Coller, CIO of Coller Capital, said: “Limited Partners’ plans to reduce their exposure to funds-of-funds illustrate two important industry dynamics: the continuing growth in investors’ skills and confidence – enabling more LPs to commit directly to GPs they like – and the more demanding nature of private equity investors as a group. There will certainly continue to be investor demand for funds-of-funds in the private equity industry, but firms that cannot demonstrate a good track record and strong value-add will increasingly fall by the wayside.”
Indeed, confidence in private equity as an asset class remains strong: with one third of LPs planning an increase in their target allocation over the next year (compared with 16% of LPs planning a reduced target); and 60% of LPs planning to increase their volume of new fund commitments in 2011. In many cases, though, the increase in 2011 (over 2010) will be modest.
Investors have particularly high expectations for their GPs’ 2010 and 2011 deals – 60% of LPs expect these investments to achieve returns of 16% or more – and this optimism is helping to boost their medium-term return expectations from the asset class. One third of LPs expect annual net returns of 16% or more in the next 3-5 years (up from 29% of LPs last year) – a return to the level seen in the Winter 2005-06 Barometer.
However, half of LPs working for corporate and public pension funds believe their institutions are not currently maximizing their returns from the asset class – they think they would be able to improve their private equity returns by hiring additional investment staff.
Venture capital investingVenture capital investing will continue to be challenging, investors think. Indeed, one fifth of LPs believe no venture capital firms will generate consistently strong returns over the next decade, and two thirds of LPs think such returns will only be achieved by a small number of venture GPs worldwide. A mere 3% of investors believe European venture capital will deliver consistently strong returns over the next ten years.
Moreover, one third or more of LPs in Europe and Asia-Pacific believe the climate for venture capital investing is getting worse (vs 15% and 21% of LPs respectively that believe it is improving). Only in North America do more LPs see an improving VC climate than a deteriorating one.
Early-stage companies in Europe and Asia-Pacific are also being starved of venture capital funding, investors think. 57% of European LPs and 63% of Asia-Pacific LPs believe this, though only one third (37%) of North American investors think the same is true in their region.
Environmental, social and governance (ESG) investment criteria ESG considerations have a significant impact on LPs’ investment decisions only in Europe. Two thirds of European Limited Partners say ESG factors are important – whereas just one fifth of North American LPs and one quarter of Asia-Pacific LPs say the same.
Additional Barometer findingsThe Winter 2010-11 edition of the Barometer also includes investors’ views on:
The prospects for fund distributions
The most promising segments of the PE market
The most likely sources of attractive PE transactions
GP fundraising in Asia-Pacific
The entry of new investors to the PE market
The timing of the next downturn in private equity