LPs happy despite approaching ‘plateau’

Limited partners are broadly happy with returns from their private equity allocations with many expecting to increase their level of investment in the asset class, despite a perception that the “golden time” of private equity can not last.

Coller Capital’s latest Global Private Equity Barometer Winter 2006-2007 polled 145 global investors and found that 97% are pleased with private equity returns over the last year and 56% are very pleased. As a result, 49% expect to increase their allocation to private equity in the next 12 months, while 57% plan to maintain current levels of investment in alternative assets.

Despite this, limited partners believe that the private equity good times are nearing a plateau: 43% believe that the exit environment in Europe will deteriorate over the next year or two, with 44% believing the same for North American buyouts. In addition, this was the first Barometer not to see a majority of respondents expecting distributions to improve in the coming year.

Chris McDermott, marketing director at Coller Capital, which is currently raising what is expected to be Europe’s largest secondaries fund, emphasised the word plateau, rather than decline. “The reason why LPs have been satisfied with their returns is that they have come significantly from buyout exits in Europe and North America. It’s been a golden time for private equity with stock markets open to IPOs compared to previous years, low interest rates and inflation leading to recaps which are partial exits, providing a lot of money back to them.

“They recognise that any of those things can change and probably will at some point – that golden climate simply can’t last the same way forever, but that’s not to say that they believe the exit environment will crumble. The conditions just won’t be as perfect as they have been.”

The most important factor in achieving success as an LP, added the Barometer, is time, enabling an investor to build up experience and awareness of the cyclical nature of the market. Other factors include the stability and incentivisation of the management team, a proactive approach to managing general partner relationships and critical mass in the investment programme, both in team size and number of fund commitments.