End of buyout boom?

Over half of private equity investors (LPs) – and over three-quarters of North American LPs (78%) – believe the credit markets’ recent difficulties signal the end of the global buyout boom, according to Coller Capital’s latest Global Private Equity Barometer. Almost half of LPs (48%) believe North America will be harder hit than other regions of the world by a private equity downturn.

LPs also lack optimism about the pace of GP investment compared to recent years. Half of investors believe the pace of GP investment will slow over the coming year, compared with fewer than 10% of LPs in the winters of 2005 and 2006.

In the medium term, however, investors’ private equity return expectations remain strong: two in five LPs (39%) expect net returns of 16%+ over the next three to five years – and this proportion rises for specific types of private equity. For example, two-thirds of LPs (65%) expect returns of 16%+ from North American venture capital and three-quarters of LPs (73%) from Asia-Pacific buyouts.

These figures explain why, despite a more downbeat assessment of the short-term outlook for private equity, there has been no diminution in investor enthusiasm for the asset class. Over the next three years, almost all LPs (96%) plan to increase their private equity commitments and three-quarters (78%) plan to increase their number of GP relationships.

Investors are also continuing to grow their exposure to private equity’s less developed markets – the proportion invested in emerging private equity markets has jumped from 26% two years ago to 40% today.

Commenting on the Barometer’s findings, Jeremy Coller, CEO of Coller Capital, said: “Most private equity investors think the benevolent conditions of the last few years will not return in the near future, but this has not shaken their commitment to the asset class. This is because they know private equity’s ability to build and enhance businesses does not depend ultimately on cheap money.”

Other topics covered in the Barometer include the barriers to investment in private equity’s emerging markets; investors’ reactions to the recent controversy surrounding private equity; direct investment in private companies by LPs; the willingness of LPs to invest with newly-established GP teams; the outlook for the terms and conditions of private equity funds; and the potential of, and challenges facing, European venture capital.