- Three quarters of LPs see attractive PE opportunities in Europe in the next 2-3 years GPs are genuinely improving the operations of their portfolio companies, investors say
- Half of LPs are targeting investments in private debt funds
- Many LPs face hostility to PE from influential colleagues within their own organisations
Five years after the onset of the financial crisis, investors (LPs) believe the core elements of private equity’s model have proved themselves, and they think PE will provide good investment opportunities as the recovery sets in, according to Coller Capital’s latest Global Private Equity Barometer.
Despite the crisis, almost two thirds (63%) of LPs still report net lifetime returns for their PE portfolios of 11-15% or higher. Two thirds of investors say PE managers (GPs) have delivered significant operational improvement in their portfolio companies over the last few years (with almost all LPs believing GPs have improved their companies’ operations to at least some extent).
And nearly all LPs (86%) say ‘whole fund’ carried interest has proved to be an effective way to incentivise PE managers.
Confidence in the asset class generally remains strong. More LPs (25%) plan to increase their target allocations to PE than plan to reduce it (14% of LPs). However, over 40% of endowments and foundations – and over one third of pension plans – say there are influential individuals within their organisations militating for PE’s allocation to be reduced or cancelled entirely.
“Private equity has confirmed its core place in institutional investment portfolios since the crisis,” said Jeremy Coller, CIO of Coller Capital. “However, complacency would be a mistake. With sceptics at senior levels within LP organisations, the industry will have to justify its performance again and again.”
Limited Partners’ investment focus and expectations
The Barometer documents investors’ current attitudes to Europe, emerging PE markets and credit investments:
Three quarters of LPs think European restructuring will provide good PE opportunities in the next couple of years, though most (63%) think these will be restricted to parts of Europe – Northern Europe especially.
One third of LPs plan to increase their exposure to credit investments in the next 12 months – and half of LPs have either invested or are considering investment in private debt funds (which barely existed before 2009). Corporate disposals, secondary buyouts, and sales by entrepreneurs are all expected to provide good PE opportunities in Europe and North America in the next couple of years.
Over half (58%) of LPs also expect bankruptcies and Chapter 11 filings to provide good PE investments.
One in five LPs sees attractive PE opportunities in the Middle East and North Africa in the next few years. And in terms of Asian markets, LPs say they will seek greater exposure to Indonesia and Malaysia.
There were a number of areas where investors expressed caution:
88% of LPs said they don’t plan to accelerate their commitments to large buyout funds in the next 2-3 years.
Over two thirds of LPs said they regard PE funds raised by publicly-quoted GPs as less attractive than those raised by private managers.
And 87% of investors believe an overhang of ageing dry powder is inflating PE entry prices – though only a quarter of LPs think the effect is significant.
PE investment environment
Almost one third (30%) of investors have reduced the pace of their new fund commitments as a result of slower GP investment and distributions, but the majority (66%) say they have not needed to take corrective action.
81% of PE investors expect M&A activity to be a principal use of corporates’ large cash piles in the next 2-3 years. This compares with 67% of LPs who think companies will retain their cash, 56% who think they will return it to shareholders, and only 44% who expect companies to invest the money in their own businesses.