10 June 2014

Coller Capital Global Private Equity Barometer – Summer 2014

Investors exploring new models of private equity engagement

Click here to download the Global Private Equity Barometer

  • One third of PE investors have increased their target allocation in the last two years
  • LPs are engaging with first-time funds and deal-by-deal investment – while trimming core GPs
  • Half of LPs at US pension plans would prefer to work for a Canadian pension plan
  • Too much debt is damaging North American private equity, LPs say

Family offices and insurance companies have led the way in increasing target allocations to private equity over the last two years, according to Coller Capital’s latest Global Private Equity Barometer – two thirds of family offices and half of insurance companies have done so. As a consequence, over half of insurance companies are below their target allocation to the asset class and need to accelerate their pace of new commitments.

Increasing target allocations reflect private equity’s robust performance in a low-yield world: one quarter of LPs are now reporting net annual returns of at least 16% across the lifetime of their private equity portfolios, and seven out of ten investors have achieved net returns of 11% plus.

New routes to success

Limited Partners are increasingly seeking new routes to private equity success. Almost all LPs (84%) will, in the next couple of years, refuse to re-invest with managers whose last two or more funds they backed. By contrast, the majority will, in the same timeframe, back first-time funds from new GPs – as many as 70% of North American LPs plan to do this. LPs interested in first-time funds are more focused on developed than emerging markets – 93% say they will commit to first-time funds in developed private equity markets, compared with one third planning to do the same in emerging markets.

The relationship between Limited and General Partners is continuing to change. Despite their recent successes in modifying the terms and conditions of new private equity funds, 44% of LPs believe there is more to come, and that terms and conditions will continue to change in their favour. Neither do they see this as a zero sum game – 60% of North American LPs would accept a lower hurdle rate for GPs in return for lower management fees (a view shared by just over 40% of investors from elsewhere in the world). Investors are experimenting, too, with alternative ways of backing private equity – with almost a quarter of LPs having backed GPs on a deal-by-deal basis since the start of the financial crisis. They are less flexible when it comes to under-performance in their current funds, however. Less than half of LPs would be willing to re-set the terms of funds unlikely to reach their preferred return in order to improve LP/GP alignment. “In a sense, Limited Partners are gamekeepers turned poachers;” commented Jeremy Coller, CIO of Coller Capital, “they know they will need to adopt an ever more proactive approach if private equity is to remain the best-performing part of their investment portfolios. This is reflected not only in their continuous reshaping of their private equity holdings, but in a willingness to explore first-time funds and deal-by-deal commitments – and even to contemplate changes to hurdle rates and fees.” The advantages of operating with fewer constraints are recognised by most Limited Partners. Two thirds of LPs would prefer to manage private equity for a Canadian rather than a US pension plan. Even half of US pension plan investors would rather be working for a Canadian plan!

Geographies and sectors

Investors remain committed to private equity investment around the world – but with a number of caveats: While most European LPs now see good investment opportunities throughout Europe (except in France), North American investors are more cautious – less than a third believe Southern Europe will offer good private equity opportunities in the next three years. Frothy credit markets are the worry for investors in North America: two thirds of LPs believe an over-supply of credit is resulting in poor deals being financed and high-quality deals being over-leveraged.

Although two thirds of LPs believe weaker sentiment towards emerging markets will hurt returns from existing private equity funds in those regions, this will not deter them from strategic changes to their regional allocations. The proportion of Limited Partners with a tenth or more of their private equity exposure in the Asia-Pacific region will double over the next three years: to 38% for North American investors, and 29% for European investors. For venture capital, LPs from all regions believe the IT sector will provide the most attractive opportunities. However, European LPs are noticeably more enthusiastic about biotech venture than their North American counterparts. Secondaries Two thirds of Limited Partners are planning to use the secondaries market – either to buy or to sell assets – in the next 2-3 years. North American investors expect to be the most active market participants, both in selling and in buying private equity interests.

Additional Barometer findings

The Summer 2014 edition of the Barometer also charts investors’ views and opinions on:

  • Returns from ‘bubble year’ PE funds
  • The implications of crowd-funding for venture capital
  • LP investment in back-office systems
  • Expected impact of the AIFM Directive

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