Coller Capital Global Private Equity Barometer – Summer 2010
LPs plan big changes to investment, as returns fall dramatically
- Half of LPs now have lifetime portfolio returns from private equity of 10% or less
- Two fifths of US LPs will prune their GP rosters over the next two years
- LPs plan big rises in their Asia-Pacific exposure - European investors most of all
- Investors think governments should avoid setting up, or investing in, VC funds
Limited Partners (LPs) are driving big changes to their private equity portfolios in response to new economic realities and dramatic falls in their overall returns from the asset class, according to Coller Capital's latest Global Private Equity Barometer.
The proportion of LPs who have made lifetime portfolio returns of 10% or less from private equity has jumped to 51% (from 22% in 2008, and 29% in 2009).
Despite this drop in returns, investors have not lost faith in the asset class. The proportion of LPs planning to increase their percentage of assets allocated to private equity in the next year is greater than those planning to reduce it (20% vs 13%). This reverses the situation last summer, when, for the first time, there was a greater proportion of LPs planning to reduce than increase their allocation. Two thirds (64%) of LPs also expect their pace of new commitments to accelerate over the next 18 months.
However, how and where LPs make private equity commitments will change rapidly in the next 2-3 years:
- Two fifths (38%) of North American LPs plan to reduce their number of GP relationships over the next two years. One fifth of European and Asia-Pacific investors also plan reductions.
- Investors are also accelerating their direct investment programmes. Half (49%) of LPs currently make investments directly into private companies, and around half of these do so on a proprietary basis (ie, not just through co-investment programmes). However, 41% of all private equity investors plan to expand their direct investment into private companies over the next three years.
- LPs are also planning very significant increases to their Asia-Pacific exposure in the short term. The proportion of European LPs with more than a tenth of their private equity exposure in the Asia-Pacific region will rise from 16% of LPs today to 38% within three years. For North American LPs the percentages will be 41% of LPs in three years' time (up from 26% today), and for Asia-Pacific LPs it will be 87% of LPs in three years (up from 69% today).
Commenting on the Barometer's findings, Jeremy Coller, CIO of Coller Capital, said: "It's natural to ask why investors are maintaining or strengthening their commitment to private equity after a big fall in their returns. The simple answer is that private equity investment is a demonstrably skill-based activity - for LPs and GPs alike - and the credit crunch and recession have been a useful, if painful, learning experience. Limited Partners, for their part, will have learned many invaluable lessons from the downturn, not just about which GPs have the requisite skills, but also how and where those skills can best be deployed."
Challenges facing private equity
Investors see several potential challenges to their private equity returns in the future. Debt is one. Most LPs (84%) see the re-financing of outstanding buyout debt as a major challenge. Significant numbers of LPs are also concerned about: the likely impact of more conservative capital structures; changes in the composition of debt syndicates; and the cost and availability of debt for new buyouts. (Two thirds of developed world LPs see a significant improvement in the availability of debt for buyouts by the end of 2011.)
Other potential challenges to private equity in the view of investors include: GPs' operational skills (one third of LPs believe most GPs lack the operational skills to turn round struggling portfolio companies); and potential changes to tax and regulation (which over a third of LPs believe will reduce their returns from European and North American funds).
The role of governments in venture capital
The large majority of investors believe national and state governments should refrain from establishing or investing in venture capital funds to support early-stage companies - 91% of North American, and around 70% of European and Asia-Pacific investors, share this view. They believe that other initiatives - tax breaks, for example - are likely to be more effective.
The Summer 2010 edition of the Barometer also includes investors' views on:
- The response of GPs to the ILPA Guidelines
- Secondary buyouts
- The likely size and robustness of the private equity industry in five years' time