Coller Capital Global PE Barometer Summer 2018
Limited Partners taking stakes in GP management companies via specialist funds is becoming a mainstream dynamic in private equity, according to Coller Capital’s latest Global Private Equity Barometer. One in six LPs already invests in this strategy, and this is likely to rise to over a third of LPs.
- 61% of LPs have recently committed to the first closes of PE funds out of fear of being ‘cut back’
- LPs with performance-related pay are three times more likely to deliver outsize PE returns
- Four out of five LPs believe GP-led secondaries will become a routine part of PE
- Even in today’s equity markets, most LPs support select public-to-private acquisitions
Another, recent development rapidly becoming mainstream is GP-led secondaries. From an almost standing start a few years ago, the volume of GP-led transactions has ballooned. The Barometer shows that such transactions are unlikely to dry up: four out of five LPs see GP-led secondaries becoming a routine part of the landscape.
High asset valuations are a concern for all investors, but they do not dampen investors’ faith in private equity’s ability to uncover and create value – even from public markets. Fully 86% of LPs believe that public-to-private transactions still make sense for private equity, on a case-by-case basis. North American LPs are the most bullish of all, with 98% supporting take-privates in the right circumstances.
“Those who doubt active management in public markets should look to private markets,” said Jeremy Coller, CIO of Coller Capital. “Private equity is active management on steroids. It has worked for investors so far, and they think it will go on working – two thirds of Limited Partners say they think the spirit of innovation in private equity is alive and kicking.”
Competition between LPs for stakes in the best private equity funds has risen in recent years. Over three-fifths of LPs have recently committed to funds’ first closings out of fear that they will fail to secure their desired size of commitment. This matters. The Barometer shows that the largest investors – those with $50bn+ of private equity assets under management – believe the biggest restraint on their returns is an inability to commit enough capital to their preferred managers.
Unsurprisingly then, finding the top managers of tomorrow remains a key concern for investors. Nine out of ten LPs report that their own research and outreach programmes have recently resulted in new GP relationships – and over three quarters of investors have sourced new GP relationships via recommendations from peers.
Securing and motivating high-quality talent is a concern for LP institutions just as it is for GPs – well over half of LPs say that not being able to recruit enough high-quality talent is a significant restraint on their ability to boost returns from the asset class. The Barometer shows that they are probably right – and also what they are doing about it. Just over half of LP institutions offer their people performance-related pay – but those institutions are three times more likely to be delivering overall private equity returns of 16%+ than other LPs. (Institutions managing third-party money and corporate pension plans are the most likely to have performance-related pay.)
Buyout and venture capital markets
Three-fifths of LPs believe that the North American buyout market is overheating, and that too many GPs are currently chasing too few deals. Half of LPs think this is the case for European buyouts. In Asia-Pacific the situation is different: one-third of LPs think the region has a shortage of high-quality buyout GPs. A similar proportion of investors holds this view about venture capital GPs outside the North American market.
Within the Asia-Pacific region, the attractiveness of buyouts in South East Asia is growing particularly fast: a net balance of a quarter of LPs think that the area will become more attractive for buyouts in the next three years. Investors are on balance positive about the outlook for buyouts all across the region (although for several national markets believers and doubters are finely balanced).
LPs’ views on venture markets in the region are more clearly delineated: the emerging markets of India, China and South East Asia are on balance seen as becoming slightly more attractive, whereas the more developed markets of South Korea, Japan and Australasia are seen as becoming less attractive.
Investors’ differing views of the venture capital and buyout markets are reflected too in the way they regard funds-of-funds. While 71% of investors believe that funds-of-funds are still an attractive option for their private equity programmes, LPs think funds-of-funds’ value lies in addressing more specialist areas of the market, such as venture capital, emerging markets, and sector-specific strategies. Only a quarter of LPs see funds-of-funds as an attractive means of investing in buyouts in North America and Europe.
Private equity returns and allocations
Investors are continuing to achieve attractive returns from the asset class. The Barometer shows that an impressive 87% of Limited Partners have achieved net annual returns of more than 11% over the lifetime of their private equity portfolios.
Allocations to private equity and to alternative assets more generally continue to reflect this success. Two in five LPs are planning to increase their target allocation to alternative assets, and a third are planning a higher allocation to private equity. Half of LPs intend to grow their infrastructure allocation, and two-fifths of LPs plan to do the same for private credit.
Almost 70% of LPs intend to maintain their current pace of new private equity commitments, in the belief that it is a long-term asset class to which it makes sense to commit capital across market cycles. Between a third and a half of LPs are continuing to diversify their portfolios – and are doing so across multiple dimensions: geography, vintage year, industry sector, investment stage, and investment theme.
Additional Barometer findings
The Summer 2018 edition of the Barometer also captures investors’ views and opinions of:
- Private credit funds
- ESG considerations as investment criteria