10 December 2008

Coller Capital Global Private Equity Barometer – Winter 2008-09

Two thirds of private equity investors (LPs) will have little or no ‘headroom’ for new fund commitments by this time next year, according to Coller Capital’s latest Global Private Equity Barometer. North American LPs will be particularly stretched – 28% expect to have exceeded their allocation to the asset class by December 2009.

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  • Over a quarter of North American LPs will be over-allocated within 12 months
  • Liquidity needs, a flight to ‘quality’ GPs and portfolio re-balancing will drive secondaries sales
  • The globalisation of private equity will not be slowed by recession or the credit crunch

Yet overall investor commitment to private equity has not wavered: 57% of LPs expect to maintain, and 40% of LPs to increase, their allocations to private equity in 2009. Between a quarter and a third of all LPs have begun investing in the asset class since the year 2000 and many of these are still growing their private equity programmes. Neither have investors’ return expectations for the medium term changed – 43% of LPs still expect net annual returns of 16%+ over the next 3-5 years. The problem for investors is not appetite, but stretched allocations and a shortage of cash.

Commenting on the Barometer’s findings, Jeremy Coller, CIO of Coller Capital, said: “With portfolios suffering from both the denominator effect and the distributions drought, LPs have three options: to increase their allocations to private equity, to cut their commitments, or to seek liquidity through secondaries. In practice, even LPs without allocation or liquidity problems will seek to access the secondaries market, because many will want to re-shape their portfolios to reflect new economic realities.”

A ‘flight to quality’ in terms of GP selection is already visible in LP behaviour – especially in the US, where 4 out of 5 private equity investors have refused to ‘re-up’ with some of their GPs over the last 12 months. In the year to come, investors will be still more unforgiving in scrutinising re-up requests: they cite poor performance from a GP’s current fund, investment style drift and disruption within a GP team as the factors that will most discourage them from re-investing.

The globalisation of private equity

Financial and economic difficulties will not slow the globalisation of private equity, the Barometer reveals. The proportion of North American LPs with 6% or more of their private equity exposure in the Asia-Pacific will grow to almost 70% within three years, from 41% today. For European LPs the story is similar – around one third have an Asia-Pacific exposure of 6%+ today, and this will rise to approaching two thirds of European LPs within three years.

India and China will continue to be the most attractive markets in the Asia-Pacific, followed by the developed economies of Japan and Australia. However, investors recognise a paradox in their collective hunger for Asia-Pacific private equity: over three quarters believe the ready availability of capital is making it too easy for weak GPs to raise funds in the region. Caveat emptor!

Investment in private equity funds targeting the Middle East will also grow. Despite perceiving significant barriers to investment in the region, 20-30% of LPs plan to dip their toes in Middle East private equity over the next three years. A negligible proportion have commitments there today.

Other topics covered in this edition of the Barometer include:

  • The expected performance of buyout investments and funds
  • LPs’ motivations for selling in the secondaries market
  • The pace of GP investment in 2009
  • Attractive areas for GP investment

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