1 June 2007

Coller Capital Global Private Equity Barometer – Summer 2007

Buyout boom drives institutional returns from private equity to record levels 

Click here to download the Global Private Equity Barometer

  • LPs from America and the Asia-Pacific are currently outperforming European LPs
  • No end is in sight for private equity’s fundraising bonanza
  • Quoted company shareholders will not refuse good private equity offers, LPs believe

Approaching half (45%) of all private equity investors (LPs) have achieved net returns of 16% or more over the lifetimes of their private equity portfolios – compared with 38% of LPs a year ago – according to Coller Capital’s latest Global Private Equity Barometer. These impressive results have been driven to a significant extent by European and North American buyout funds, from which over 60% of LPs have achieved net returns of 16% plus.

European LPs have underperformed North American and Asia-Pacific investors

Overall, the portfolios of European investors have performed less well than those of their Asia-Pacific and North American colleagues, with only 38% of European LPs reporting net returns of 16% or more – compared with half of LPs elsewhere in the world.

There are two reasons for this unequal performance: first, European LPs have had a higher exposure to European venture capital (a poorly performing area of private equity) than their Asia-Pacific and North American colleagues; and second, far fewer European investors have achieved top-notch returns from Asia-Pacific buyouts – only 18% have achieved net returns of 16% or more, compared with 60% of North American LPs, and two thirds of Asia-Pacific LPs.

No end in sight for private equity’s fundraising bonanza

Despite having allocated record sums to private equity in 2005 and 2006, investors have no plans to slow down: almost half of LPs (47%) are planning increased private equity allocations in the coming year – a proportion that has hardly changed over the last couple of years. Only 1 in 20 investors is planning a decreased allocation.

The performance of large buyout funds

In absolute terms, the greater part of this institutional money will continue to flow to large buyout funds. Investors are acutely aware that this may impact returns – 88% of LPs see this ‘wall of money’ as the biggest risk to the performance of large buyout funds.

There has been some speculation in the media that public company shareholders will start to refuse private equity bids, but only one third of investors believe this is a significant risk to the performance of large buyout funds.

Over half of investors (59%) believe that a reduction in the availability of bank debt could affect the future performance of these funds, and a similar proportion believe that management fees could disincentivise some GPs.

The implications of non-financial restrictions in investment mandates

LPs are divided about the effect of non-financial (eg, geographical or ‘ethical’) restrictions on portfolio performance. Almost three quarters of LPs whose mandates have such restrictions believe it makes no difference – but an almost identical proportion of LPs whose mandates don’t have such restrictions believe their effect is to reduce portfolio returns.

The decision to invest or not invest with a GP – key considerations

The two most important considerations for LPs in deciding whether to invest or re-invest with a GP are the aggregate performance of a GPs’ funds (cited by 85% of LPs), and continuity/succession within GP teams (cited by 84% of LPs).

Three issues have become more important for LPs in the 2-3 years since the Barometer last researched this issue: the performance of a GP’s most recent fund (presumably because LPs believe GPs should have made good returns in the recent benign climate for private equity); the quality and transparency of a GP’s reporting (which is especially important to Asia-Pacific investors); and the apportionment of carried interest within a GP’s team.

Other topics covered in this edition of the Barometer include:

  • The helpfulness of gatekeepers and funds-of-funds in gaining access to top GPs
  • The secondaries market
  • The prospects for distributions over the next 12 months

Commenting on the Barometer’s findings, Jeremy Coller, CEO of Coller Capital, said: “The Barometer underlines the importance of a proactive and globally-focused approach to the management of private equity portfolios – restricting investment to familiar or ‘local’ markets will not maximise returns. With so much institutional money flowing into the asset class, investors must be prepared to reshape their portfolios constantly, in order to accommodate new trends and managers, and to take advantage of emerging markets. In terms of innovation, LPs need to behave like GPs.”

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