When public equity investors turn overwhelmingly bullish, many professional money managers view it as an unequivocal sign to sell, sell, sell. Now a fresh survey of investors in private equity funds shows them counting their winnings and gearing up for bigger allocations. Another sign of trouble ahead?
According to the survey report, “Global Private Equity Barometer: Summer 2011,” published by U.K. secondary buyer
Altogether on behalf of Coller Capital, IE Consulting, a division of Incisive Media, surveyed 110 limited partners—roughly four in 10 (43 percent) from Europe, a third from North America (38 percent), and a fifth (19 percent) from the Asia-Pacific region. Among the biggest categories of respondents were public pensions (14 percent), endowments and foundations (13 percent) and family offices and private trusts (13 percent). Funds of funds were excluded. Surveying took place from March through April, a time when economic indicators were looking more promising than they were at press time.
Needless to say, the picture in the rear view mirror has improved for private equity investors since the financial crisis reached its climax a few years back. Nearly two-thirds of investors (62 percent) have seen their private equity portfolios deliver 11 percent to 15 percent returns since inception—well above what they could hope to generate in the public equity markets over the long haul. For North American LPs, the share is even higher, at 71 percent, while the figure is 58 percent for Asia-Pacific LPs and 53 percent for European LPs.
Investor optimism appears to be rooted in more than just satisfaction with prior returns. Well more than half of the respondents (60 percent) say that “high-quality” buyout deals are being financed “to an appropriate level,” far more than the 20 percent that say the debt markets are, in essence, too frothy, and the 20 percent that say debt is too scarce “to finance all high-quality deal opportunities.” Two thirds (63 percent) say the debt-to-equity ratio of buyout deals is “about right.” Two thirds (64 percent) expect to see a big pick-up in exits to strategic buyers within the next 12 months.
The survey results are welcome news for general partners, although the survey also raises red flags. For one, the return of good times apparently has more investment officers contemplating a change in jobs—never a welcome development for long-term-commitment-minded GPs. Respondents on average believe that, within two years, a quarter of their peers will take new jobs. Meantime, the desire to sell limited partnership interests on the secondary market, according to the survey, remains high, as investors look to rid themselves of interests in funds with little upside, or to change their mix of investments within private equity. Within the next two years more than a third of North American respondents, a quarter of European respondents and 42 percent of Asia-Pacific respondents plan to sell interests on the secondary market, the survey found.
Seasoned followers of LP surveys know that you don’t have to go too far back in time to find another period of investor optimism. The Barometer report released in the middle of 2008 found nearly 40 percent of LPs planning to raise their target allocations to private equity over the next 12 months, compared with less than 10 percent that planned to reduce them. We all know what came next.
“There are good reasons to be optimistic in many ways about how well the private equity industry has come through this cycle,” said Jonathan Gutstein, a partner in the New York office of Coller Capital. But, he said, “there certainly are potential headwinds.”