LPs unrealistically expect GPs to produce high returns.
That’s according to a survey of investors and GPs conducted by Palico SAS, which operates an online marketplace for the PE fund community. More than half, or 55 percent, of GPs questioned think LPs are overly optimistic. In addition, nearly two-thirds, or 71 percent, of investors also believe LPs expect too much from GPs, the study said.
Palico, however, said the impression held by LPs and GPs is wrong. When specifically questioned what their return expectations are, only a minority, 33 percent, of LPs think returns will rise. On the other hand, nearly two-thirds, or 65 percent, of GPs believe PE returns will increase, at least modestly, from their current levels over the next three to five years.
“LPs definitely don’t have on the rose-tinted glasses that most professionals — investors and fund managers alike — think they do,” said David Lanchner, spokesman for Palico, which has offices in New York and Paris.
Brian Rich, co-founder and managing partner of Catalyst Investors, also doesn’t think LPs are unrealistic. He said he’s heard “numerous times” from LPs that boards are mandating them to achieve unrealistically high returns versus the public markets and risk-free returns of a similar duration. “Not surprising as PE has outperformed the risk-adjusted market returns over the long term,” Rich said in an email. “This puts pressure on [LPs] to have such expectations or to increase their portfolio’s percentage of PE.”
To compile the study, “Global Private Equity Compass,” Palico surveyed 92 LPs and 159 GPs between July 29 to September 14. Half of the LPs were located in the United States and Canada, while 35 percent were in Europe. Of the GPs, 38 percent were located in the United States and Canada, while 26 percent were in Europe.
Nearly one-third, or 29 percent, of the LPs worked in a family office/private trust, while 20 percent were in a fund-of-fund. About one-fifth, or 22 percent, of the GPs were in buyout funds, 21 percent were in growth funds, and 18 percent hailed from venture capital funds, the study said.
The vast majority, 80 percent, of GPs surveyed worked in small firms, those with under $500 million in assets under management. Only 29 percent of LPs were in this group, while 11 percent worked in firms with AUM of $500 million to $999 million. Ten percent of the LPs that responded to the Palico study worked in large firms, those with over $50 billion of AUM.
LPs and GPs did share some beliefs. About 40 percent of each group, LPs and GPs, think prices for PE assets are “unreasonably high.” Nearly half, or 49 percent, of LPs believe purchase-price multiples will fall over the next 18 months. Fifty-one percent of GPs agree with that sentiment, Palico said.
Most LPs surveyed, 67 percent, believe the falling euro makes Europe a highly attractive investment opportunity. Roughly half, or 51 percent, of GPs agree, while the 49 percent of GPs said now is not the time to invest in Europe.
On the regulatory front, more than half, or 38 percent, of GPs think lifting regulatory hurdles on highly leveraged lending would boost PE-backed acquisitions with attractive long-term prospects. Only 31 percent of LPs agreed with that sentiment, Palico said.
Action Item: See the study here: Palico Global PE Compass Fall 2015