LPs jostle for position in European buyouts

US LPs are looking for an even larger share of the European buyouts business, according to Coller Capital’s debut issue of its global private equity barometer. The London-based private equity firm is planning twice-yearly polls of the plans and opinions of institutional investors in private equity based in North America, Europe and Asia-Pacific.

“We expected optimism, but even we were surprised at the level of enthusiasm for private equity,” said Jeremy Coller, CEO of Coller Capital. “Europe is seen to offer particular opportunities because it is a less perfect market than the United States.”

The barometer shows that 42% of investors are under their target allocations to private equity. Regionally, there are striking differences, with 75% and 80% of European and Asian LPs already at their targets, but only 35% of North American investors at the desired level.

Investors say they will act to fulfil their target allocations. Appetite for all types of alternative assets is strong, with 43% planning to increase their exposure to private equity and 45% planning to do the same with hedge funds.

As the ambitions of LPs in all jurisdictions collide, competition will be most intense for access to European buyout funds. The sub asset class was ranked above everything else as the most attractive investment opportunity of the next 12 months.

“It is clear that investors all over the world are looking with interest at the private equity asset class and that European buyouts are the market of choice. I think European buyouts will remain in favour for at least the next three years, as restructuring continues apace in Continental Europe,” Coller said.

Overall, three-quarters of investors expect net returns of 11% to 20% from private equity within that timeframe. That rises to 79% for European buyouts, compared with 76% for US buyouts and 74% for Asian buyouts.

Reaction to European buyout returns so far is also upbeat. Some 87% of investors were either satisfied or very pleased with their yearly returns. This compares unfavourably with 93% satisfaction at those levels in the US, but many North American LPs are already finding themselves locked out of the best buyout funds and are looking outside the US for alternative opportunities.

The dynamic is not lost on European investors. Christoph Manser, head of alternative investments at Swiss-based insurer Winterthur, says competition from US LPs has been evident for the last two years.

“The trend has become even more pronounced recently,” he says. “[US] LPs have looked at what the GPs have been doing and followed them into the European market. In addition, this trend has been supported by European buyout funds showing better returns than the US peers.”

Unlike many insurance companies and pension funds, Manser has no plans to increase his already hefty allocation to private equity. He acknowledges, however, that the extra competition has encouraged him to look at other potential areas, such as the lower middle market or country specific funds.

There too though, competition may start to make itself felt. “We can expect to see more activity from US GPs. They are already very active at the top end of the buyout market, and I think their interest in the middle market will continue to grow,” Coller said.

And the GPs are already there. According to Close Brothers Corporate Finance, a growing number of US buyout firms are preparing to cross the pond. Once financial leverage is factored in, US middle-market private equity groups have about US$250bn in buying power, Close believes.

All of this is good news for the abundance of GPs expected to hit the fundraising trail next year. Significantly, 53% of investors expect to increase the overall number of their GP relationships in the coming year.

Many of these are likely to be US LPs new to Europe road-testing multiple buyout firms. In their own more mature market, however, US LPs have far more information on which to compare GPs and there is more of a consensus as to which are the best performers.

GPs will not have everything their own way despite the strong liquidity prospects. Between 90% and 98% of investors expect GP’s terms and conditions either to remain the same or to change in their favour. This applies to buyouts and venture funds across the world. Some 65% of investors also expect improved distributions across their portfolios next year.