Coller: LPs seek to add PE managers to portfolios, reversing consolidation trend

  • 40 pct of LPs want to add managers to their portfolios
  • Just 20 pct want to cut GP relationships
  • LPs also demonstrating preference for specialized firms, strategies

For the first time in several years, institutional limited partners are looking to add managers to their private equity portfolios.

Coller Capital’s recently released Global Private Equity Barometer says 40 percent of LPs the firm surveyed said they planned to increase the number of PE firms in their portfolios over the next three years. Just 21 percent said they would reduce their number of relationships.

“In the past, these reports have highlighted the trend of LPs wanting to reduce the number of managers,” said Eric Foran, a Coller Capital partner. “This barometer reports a reversal in that trend.”

Several major institutions, such as California Public Employees’ Retirement System and State of Wisconsin Investment Board, in recent years sold stakes in existing funds to reduce the number of funds in their portfolios.

Over the past half-decade, Coller’s survey findings typically found that LPs were looking to reduce the number of relationships in their portfolios. In one survey, issued in winter 2012-2013, Coller found that 47 percent of North American GPs would cull managers from their portfolios in the coming years.

The strategy appeared to offer many benefits. Committing larger amounts to a smaller number of funds could result in more favorable fund terms with certain general partners, along with the possibility of preferential rights to invest alongside funds on a no-fee or no-carry basis.

In CalPERS’s case, however, those benefits never fully materialized, consultant Meketa Investment Group reported at a recent retirement system board meeting. Reducing commitments to a handful of managers also made it difficult for CalPERS to commit enough capital each year to meet its asset-allocation target, which calls for 8 percent of its portfolio to be in PE.

The $345.3 billion retirement system is exploring pursuing new investmentsthrough an outside entity, which could be a firm like BlackRock.

Another reason some LPs might be increasing their roster of relationships could be the growing preference for firms that specialize in one strategy, sector or geography, Foran said. Roughly two-thirds of North American LPs said they prefer specialists to general PE strategies, the Coller survey shows.

“Could it be LPs are being more targeted in identifying a specialized GP?” Foran said. “That could be the case as well, as opposed to hiring a Pan-European or Pan-American investor who will give an LP exposure to a number of different strategies.”

“It does suggest that a majority of LPs are favoring single product firms now, specializing in a particular area. And that trend looks like it will continue into the future,” he added.

Coller’s Global Private Equity Barometer included the plans and opinions of 110 private equity LPs based in North America, Europe and the Asia-Pacific region. Coller Capital invests in private equity through the secondary market, where it acquires stakes in portfolios and direct investments in companies.

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