Europe’s institutional investors are still committed to private equity, despite the continued downturn according to research by AltAssets. Although there was disillusionment about investments 42 per cent of the 110 investors surveyed for the Limited Partner Perspective research report plan to increase their private equity allocation over the next five years.
However, there are lessons for general partners. The survey shows frustration with the industry is leading to more rigorous and discriminating fund selection, with increasingly sophisticated investors making more demands about the terms and conditions of participations. When considering teams for potential investment LPs value track record and private equity experience above operational experience of managing businesses. This turns on its head the assumption by managers that tough market conditions devalued financial engineering skills in favour of operational capabilities. Of the investors, 74 per cent rated track record and private equity experience as important, compared to only 40 per cent who preferred operational experience.
Richard Sachar, chief executive of AltAssets, said many viable managers fail to appeal to investors for basic reasons such as a lack of transparency, poor quality of presentation materials and unsophisticated reward structures. Other contentious issues are inconsistent investment strategies and the lack of integrity in promotional material. Sachar says: “Managers need to communicate to LPs that they have the characteristics they are looking for.”
Respondents included pension funds, banks, insurance companies, asset management companies, fund-of-funds, foundations, endowments and family offices with a total of EURO89 billion currently allocated to private equity. At present 43 per cent of the LPs allocate over three per cent of their assets to private equity, however an additional 24 per cent predict they will raise their contributions to this level. The most enthusiastic investor groups were public pension funds and UK institutions, 81 per cent and 58 per cent of which plan to increase their allocation. Only two per cent plan to reduce commitments to the asset class.
Investors intend to make fewer commitments to US private equity funds, a move that will benefit European firms. Europe is currently the destination for 41 per cent of the respondents’ capital, with 44 per cent going to the US. Over the next five years this split should shift to 42 per cent for the US and 43 per cent for Europe. The survey revealed that Germany is thought to be the most attractive European market, with a more reliable, quality deal flow on the horizon. Spain, Scandinavia, France and the UK lead the rest of Europe.
Investors are looking for improved returns in the next five years with buyout investments yielding a premium of five, and venture capital eight, percentage points over listed equities. However, they do not expect the returns of 30 per cent-plus that they experienced at the top of the cycle.