Investors in the private equity industry are worried that buyout firms will stray too far from their expertise as the credit crunch limits their ability to do large buyouts, according to a report by
Global Private Equity Barometer, Coller’s bi-annual survey of more than 100 limited partners, reported that many large private equity firms, which raised billions during the boom of the past few years, are faced with the problem of being unable to find places to put that capital to use if not into leveraged buyouts. Thus, some have pursued investments in emerging markets, taking minority stakes in public companies or buying debt of their portfolio companies, which worries LPs.
Three-quarters of limited partners are worried that private equity fund managers will move into strategies or geographies that they don’t know enough about, the survey said. The concerns are particularly acute in North America, where 84% of LPs see the strategy drift as a risk to their returns, the survey said.
“The real problem with strategy drift to investors is that you’re betting on a management team having expertise and experience and a track record in a certain type of investing,” said Frank Morgan, a partner at Coller’s New York office.
Despite the concerns, more than one-third of the LPs surveyed are planning to increase their allocations to private equity over the next year, with only 3% planning a reduction.
LPs thought the best opportunities in private equity in the coming year would be in small and medium-sized European buyouts. They said that the best sectors were those with long-term growth potential, such as health care and technology, while those at risk from economic downturn, like real estate and consumer, were seen as less attractive. —Dan Primack and Reuters