Investors braced for allocation breach in 2009

Private equity allocations are set to soar in 2009 as a result of the denominator effect and the lack of distributions combine to push LP portfolios over their limit.

In research published by secondaries specialist Coller Capital, two thirds of investors will be close to or will breach their private equity allocations. Over a quarter – 28% – of North American LPs are expected to exceed their exposure.

Falling share prices and other asset classes has meant that many of the world’s investors are now struggling to find room for further PE commitments, despite the fact that the Coller report shows that 57% of them are expected to maintain, and 40% increase, their allocations in 2009.

CIO Jeremy Coller said: “With portfolios suffering from both the denominator effect and the distributions drought, LPs have three options: to increase their allocations to private equity, to cut their commitments, or to seek liquidity through secondaries. In practice, even LPs without allocation or liquidity problems will seek to access the secondaries market, because many will want to re-shape their portfolios to reflect new economic realities.”

The consequence for GPs is that many are finding it hard to raise capital – in the US, four out of five LPs have turned away re-up opportunities over the last 12 months. The Coller research found that this is a trend set to continue, with two thirds expected to refuse re-up requests: “In the year to come, investors will be still more unforgiving in scrutinising re-up requests: they cite poor performance from a GP’s current fund, investment style drift and disruption within a GP team as the factors that will most discourage them from re-investing.”

Regardless of the troubles currently afflicting the wider economy, the report also shows that the globalisation of private equity is set to continue apace. The proportion of North American LPs with 6% or more of their private equity exposure in the Asia-Pacific will grow to almost 70% within three years, from 41% today. For European LPs the story is similar – around one third have an Asia-Pacific exposure of 6%+ today, and this will rise to approaching two thirds of European LPs within three years.