Coller Capital Global Private Equity Barometer - Summer 2016
Growth in shadow capital will reduce PE fund returns
- Mid-sized Limited Partners (LPs) are struggling to invest at scale with their chosen General Partners
- Investors believe that private equity’s reputation is gradually improving
- Private equity (PE) investors query the limited use of performance-related pay in their institutions
Two thirds of LPs believe that the rapid growth of private equity ‘shadow capital’ – LPs’ direct investments, co-investments and separate accounts – will reduce the returns of commingled private equity funds, according to Coller Capital’s latest Global Private Equity Barometer.
The Barometer also explains the popularity of co-investments, a form of shadow capital embraced by around half of private equity investors: almost two thirds of LPs report that their co-investments have generated higher returns than their overall private equity portfolios in recent years.
Investors believe the investment environment is becoming more difficult to navigate – almost 70% of LPs say that the unpredictability of today’s global economy is making investment decisions inherently harder. This fact has not dampened their enthusiasm for private equity, however – with 88% of LPs intending to maintain or accelerate their pace of commitments over the next couple of years.
“Investors can see past short-term market fluctuations” said Jeremy Coller, CIO of Coller Capital. “In a world where many asset classes are unpredictable or struggling, they believe private equity will continue to deliver good long-term risk-adjusted returns.”
Limited Partners have become more discriminating in recent years – 70% of LPs say that private equity investors are less loyal to individual GPs than they used to be – and this has increased the competition between LPs for the most in-demand funds. Heightened competition has proved challenging for some investors, especially medium-sized ones – almost 90% of medium-sized Limited Partners say they are struggling to invest at the level they want with their chosen managers.
Investor recruitment and remuneration
Investors in private equity believe that investment talent is becoming more mobile within their sector; two thirds of LPs say individuals are more likely to move to another investing institution than they were five years ago.
Investor views on the way they are paid is interesting in this context. Over half of LPs believe that a performance-related element should be added to – or comprise a larger part of – their remuneration.
Private equity’s reputation
The reputation of the asset class is gradually improving, investors say. Two thirds of LPs believe that private equity’s reputation is neutral or good now, compared with 55% of LPs in the Barometer of Summer 2012. Encouragingly, 44% of investors committing to private equity believe that the industry deserves a better reputation
Investment commitments and returns
A quarter of LPs are planning to reduce their target allocations to hedge funds. However they are, on balance, planning to increase their exposure to other kinds of alternative assets – around one third of LPs intend to increase their allocations to private equity, infrastructure and real estate.
LPs are continuing to achieve attractive returns from private equity – with 87% of LPs having achieved net annual returns of more than 11% over the lifetime of their private equity portfolios, and one fifth having achieved net returns of over 16%. One third of LPs have had net returns in excess of 16% from North American buyouts, and over a quarter of LPs achieved similar returns from European buyouts.
Investors say that they expect the returns from private debt funds to decline over the next 3-5 years.
The outlook for developed and emerging private equity markets
LPs as a group expect private equity conditions to improve gradually over the next couple of years, with 2017 being a stronger vintage year than 2016 in North America and Europe. Conditions in North America this year are generally thought to be more challenging than those in Europe – with two fifths of investors saying they expect 2016 to be a weaker-than-average vintage year in North America.
Investors are pursuing similar strategies for North American and European private equity. As a group, they are planning to reduce their exposure to large buyouts slightly, and build exposure to small and mid-market buyouts, to growth capital and to private debt.
In emerging private equity markets, Asia is a favoured destination for investors. Over half of LPs have exposure to Chinese private equity, and a quarter of this group plan to increase their commitments. Two fifths of LPs have exposure to South East Asia and India, and 17% of these LPs plan to add to their commitments in each region. Although only just over a tenth of Limited Partners currently have private equity exposure to Africa, one third of this group are planning to increase their commitments.
Additional Barometer findings
The Summer 2016 edition of the Barometer also charts investors’ views and opinions on:
- Some likely uses for GPs’ reserves of dry powder
- Fund management fees and carried interest