LPs remain bullish on private equity in Coller Capital, Hamilton Lane surveys

  • LPs maintain confidence in buyout funds
  • GPs returning more cash to investors
  • More M&A seen between sponsors

About 44 percent of limited partners believe private equity has become more attractive in the years following the global financial crisis, while 12 percent believe it’s become less attractive, according to Coller Capital’s latest Global Private Equity Barometer, presented to about 200 attendees at the Buyouts Texas event by Luca Salvato, partner at the firm.

More than 37 percent of investors plan to increase their target allocation to private equity over the next 12 months, half of sovereign wealth funds are working on growing their private equity teams, along with nearly half of insurers and asset managers, according to the survey.

U.S. private equity firms have been helped by the recovery in the housing market and an uptick in employment, but face risks tied to fiscal gridlock in Congress and the challenges of paring back the U.S. Federal Reserve’s quantitative easing, Salvato said.

The debt markets are seeing a bit of a “déjà vu” from before 2008, with PIK securities back to near record levels and more dividend recaps, but 62 percent of LPs think current debt levels are acceptable, he said.

Erik Hirsch, chief investment officer of Hamilton Lane, said private equity suffers from a lack of authoritative data and that the business is “ripe with myth” and uneven reporting.

“I’ve never met a second-quartile GP,” he joked, referring to how private equity firms use favorable data to promote their funds.

After surveying about 2,200 funds, Hamilton Lane released data that disproves often-held notions that private equity returns are low and that private equity isn’t growing, among others.

Hirsch said 2013 may rank as possibly the fourth best year ever for private equity fundraising. But that figure doesn’t include the “shadow fundraising” for direct investments, co-investments and secondary transactions. Such deals have contributed at least $250 billion to $375 billion since 2007, he said.

General partners returned more cash through distributions to LPs in 2013 than any other year, and 2014 will likely surpass that figure. But cash back as a percentage of net asset value of LP investments has been lower.

With rising net asset values, GPs will be under more pressure to sell companies, leading to more secondary transactions between firms, Hirsch said.

“These deals aren’t bad and evil,” Hirsch said at a presentation at Buyouts Texas.

Nobody criticizes equity fund managers for buying and selling certain publicly-traded stocks, which often change hands between mutual funds.  Yet the same activity among private equity firms is often frowned upon.

“I find that odd,” he said.

After studying exits from GPs, Hirsch said the data doesn’t reveal any negative consequences of portfolio company deals between private equity firms.

Separately, an Ernst & Young survey said  private equity fundraising in 2013 rose 40 percent to $208.4 billion, with the number of funds increasing by 18 percent to 277 from 235 a year ago.

Acquisition activity declined 19.7 percent to 664 deals from 827 in 2012, and exit activity declined 7.4 percent to 378 deals.

“The outlook for private equity fund-raising remains strong and deal activity should increase in 2014, supported by strengthening economic fundamentals and readily available financing,” Jeff Bunder, Ersnt & Young global private equity leader, said in a prepared statement

“Public pensions in markets such as China, Peru and Mexico are increasingly investing in PE, a trend we expect to continue in the coming years.”