29 June 2005

Coller Capital Global Private Equity Barometer – Summer 2005

Institutional appetite for private equity continues to grow, but the most attractive areas of the market show signs of overheating, investors note.

Click here to download the Global Private Equity Barometer

Institutional investors (LPs) anticipate an even more active private equity market in the coming year, according to Coller Capital's latest Global Private Equity Barometer, but their satisfaction with the best and worst-performing areas of private equity is polarising, and they expect that increasing competition for deals, together with problems accessing the funds of the top private equity firms (GPs), will limit their future returns.

However, the Barometer indicates continuing growth in the private equity market, both in the next year and in the longer term.

In the short term, around half of LPs expect the pace at which private equity firms 'call down' and return money to increase over the next year. Around the same proportion (52%) are intending to increase the overall number of their GP relationships during the year, with two thirds planning new GP relationships.

The longer-term prospects for the market are also underpinned by investors' intentions. During the coming year, around one third of LPs plan to increase their allocations to alternative assets generally, and to private equity and hedge funds specifically, (though this proportion is somewhat lower than at the time of the last Barometer in late 2004).

On the other hand, some of the short-term growth in the market will be at the expense of the worst-performing GPs. Almost half of LPs (45%) have refused to 're-up' (re-invest) with some of their current GPs in the last 12 months. Three quarters of investors who terminate relationship with GPs do so to focus more resources on their best-performing managers.

European private equity represents the two extremes of investor satisfaction with returns from the asset class. 100% of LPs are either satisfied or very pleased with their returns from European buyouts in the past year (up from 87% six months ago), whereas over half (54%) of LPs are now disappointed with their returns from European venture capital (up from 36% in the last Barometer).

This polarisation is also reflected in LPs' global rankings. LPs ranked the opportunities for investment by GPs over the coming year in the following order of attractiveness: European buyouts, Asia-Pacific buyouts, North American venture, North American buyouts, Asia-Pacific venture, European venture.

However, although LPs from all regions believe the European buyout market offers the best short-term investment opportunities, this optimism is tempered by a number of factors: most investors are apprehensive about the level of competition for large and mid-sized transactions, and more than half are concerned about the number of club (consortium) deals and about access to the best-performing funds.

Investors see Central and Eastern Europe as the most attractive area in Europe for GP buyout investments, followed by Germany, and, in third place, Spain.

Commenting on the findings, Jeremy Coller, chief executive of Coller Capital, said: "The Barometer shows that institutional investors are planning to throw still more fuel on the private equity fire – but not blindly. Investors are becoming more active in managing their portfolios – recognising and rewarding good GP performance, exiting under-performing relationships, and being willing to experiment with new GPs and new areas of private equity, in the hunt for superior returns."

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