25 January 2006

Coller Capital Global Private Equity Barometer – Winter 2005-06

Investor appetite for private equity accelerates, as hunger for hedge funds slows. Private equity investment in emerging markets to grow rapidly.

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Institutional investors (LPs) expect almost every aspect of private equity to grow in the coming year, according to Coller Capital's latest Global Private Equity Barometer, but they are worried by levels of competition in established markets and plan to increase their investment in emerging markets significantly over the next three years. They believe hedge funds will pose a serious challenge to private equity firms (GPs) in the coming year, but will be unable to compete in private equity in the longer term.

Even more LPs are planning increases to their private equity allocations than they were six months ago – 44%, up from 30% – while their appetite for hedge funds has slowed over the same period – 30% are planning increased allocations to hedge funds, down from 37% six months ago.

The growing appetite for private equity is underpinned by LPs' still-increasing satisfaction with returns across most categories of private equity and with the strong flow of distributions from private equity funds – which a majority of investors (53%) expect to accelerate over the coming year. Neither is the pace of GP investment expected to slacken – just 9% of LPs expect it to be slower in the next 12 months and 43% expect it to speed up.

Investors are becoming more and more active in their search for winning strategies: 58% are planning new GP relationships in the coming year, and for the first time more than half of LPs (56%) said they had recently refused to 're-up' with some of their current fund managers – up from 45% six months ago.

Although they are determined to put more money to work in private equity, investors are worried about the effect this will have on returns: 84% of LPs are concerned about levels of competition in established markets, and 71% are worried about the growing size of private equity funds.

Emerging markets will be the beneficiaries of this concern.

Although at present only a quarter of investors have commitments to emerging market funds, 55% of LPs worldwide plan to increase their exposure over the next three years. Around three quarters of LPs see India, China and Central & Eastern Europe as very attractive for private equity investment. South East Asia was the next most popular choice – nominated by around 60% of LPs.

The majority of investors (61%) expect buyout firms to face stiff competition from hedge funds in the coming year. However, three quarters of LPs believe hedge funds will be unable to compete in the private equity market in the long term.

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