7 December 2015

Coller Capital Global Private Equity Barometer – Winter 2015-16

Private Equity investors ‘lack the skills and experience for successful co-investing’

Click here to download the Global Private Equity Barometer

  • The number of Limited Partners (LPs) having ‘special accounts’ with GPs has jumped dramatically
  • An LP’s scale and degree of operational freedom help determine the level of its returns, LPs believe
  • Individuals with outstanding track records are the ‘magic ingredient’ for LPs considering debut funds

Fully 84% of LPs believe that private equity investors in general do not have the skills, experience and processes needed to do co-investing well, according to Coller Capital’s latest Global Private Equity Barometer. This is not only because meeting GP deadlines is hard (though 71% of investors acknowledge this) or because they are unable to recruit staff with the necessary skills (acknowledged by half of LPs) – but also, 55% of investors say, because Limited Partners have an insufficient understanding of the factors that drive the performance of co-investments.

Investors also expect a divergence in the returns that different types of Limited Partner will earn from the asset class. They believe small investors are increasingly being disadvantaged by the volume of money being committed by their large peers to individual funds (because small LPs have limited access to, and less negotiating-power with, the best GPs, for example). They also think that investors with a higher degree of operational freedom (to embrace direct investing, or open overseas offices, or set their own compensation levels, say) will achieve higher returns from private equity than more constrained investors.

The proportion of LPs with special (or managed) accounts attached to private equity funds has risen dramatically in the last three years or so – from 13% of LPs in Summer 2012 to 35% of LPs today. 43% of investors believe that this growth in special accounts is a negative development for the industry, on the grounds that it creates potential conflicts of interest.

“A huge amount gets written about the shifting dynamics of the private equity industry,” said Jeremy Coller, CIO of Coller Capital, “but the vast majority of it looks at it from a General Partner’s point of view. This edition of the Barometer provides valuable food-for-thought on the evolution of the industry for the trustees and CIOs of pension plans and other investors.” 

Areas of investor focus 

Direct private equity investing has been a growing focus for many investors. The Barometer suggests this trend will continue: just over a third of investors plan to recruit investment professionals with skills and experience in directs over the next 2-3 years. However, few investors (just 8% of LPs) believe directs will supplant commingled funds altogether: three quarters of LPs expect both types of investing to remain important parts of the Limited Partner ‘toolbox’.

Investors also remain committed to expanding their emerging markets footprints. Over the next 3-4 years, the proportion of LPs with more than a tenth of their private equity exposure in emerging markets will rise from 27% to 44% (notwithstanding the 41% of investors who report that their private equity commitments in emerging markets have underperformed their expectations to date.) And on balance, Limited Partners remain positive about the prospects for China – with 37% of LPs saying China will be a more attractive destination for private equity investment in five years’ time, compared with only 17% who say it will probably be a less attractive destination.

With many investors having backed debut funds from newly-formed GPs since the financial crisis, the Barometer probed what LPs are looking for in these investments. Investors said several factors influenced them, but one factor in particular was cited by almost all LPs (94%), namely, that the new GP team in which they had invested contained individuals with an outstanding investment track record in other roles. 

Expected returns and asset allocations 

Investors’ medium-term return expectations remain strong, with 86% of Limited Partners forecasting net annual returns of 11%-plus from their private equity portfolios over the next 3-5 years. (They are almost unanimous that the biggest risk to this picture is today’s high asset prices.) Indeed, the majority believe it should be possible – at least for switched-on Limited Partners – to continue earning returns at this level even beyond a 3-5 year horizon, because they think new investment opportunities will open up even as established parts of the private equity market mature.

The Barometer also probed investor views on the implications of a ‘Brexit’ (an exit by the UK from the European Union) for the performance of European private equity as a whole. Very few investors (just 6%) think a Brexit would have positive implications for their European private equity returns, while one third of LPs believe it would reduce their returns.

The growing attraction of alternative assets shows no sign of diminishing, with 41% of Limited Partners planning to increase their target allocation to these asset classes over the next 12 months. Almost half of LPs (46%) plan to boost the share of their assets in infrastructure, with over one third (37%) planning an increase in their allocation to private equity.  

Additional Barometer findings 

The Winter 2015-16 edition of the Barometer also charts investors’ views and opinions on:

  • The importance of corporate brand for GPs
  • Expected returns from different regions and types of private equity
  • The implications of potential changes in the transparency and tax treatment of PE fees
  • LPs’ ongoing appetite for private debt funds
  • LPs’ plans for, and expected benefits from, upgrading their back office technology

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