Need To Know

Roughly one in four general partners could fail in their efforts to raise new funds over the next seven years, according to a recent survey of limited partners conducted by secondary firm Coller Capital. As the poll notes, this would effectively mean the firms would go out of business once the investments of any prior vehicles were wound down.

The latest Global Private Equity Barometer surveyed roughly 120 LPs from North America, Europe and the Asia-Pacific during the spring of 2009. The poll found the average LP estimate of the percentage of GPs that would fall by the wayside due to the recession to be 28 percent for venture capital firms and 23 percent for buyout shops.

Underlining the difficult fundraising environment, the survey found 84 percent of LPs had declined to re-up with one or more of their GPs in the past 12 months. That figure far eclipses 45 percent who said the same thing in the summer of 2005. An overwhelming 92 percent of North American LPs fell into this category in the 2009 poll, compared to 82 percent of LPs in Europe and 70 percent in Asia.

As for their own health and prospects, LPs anticipate one in 10 of all private equity investors will default on a commitment within the next two years. North American LPs were more pessimistic than their counterparts across the globe, forecasting an average default rate of 13 percent for the region, compared to 8 percent and 7 percent respectively for Europe and Asia.

The poll found LPs are pretty confident their bargaining power with GPs on terms and conditions is primed for improvement. Overall, around 80 percent of LPs said they expect terms and conditions to become more favorable to them for funds raised over the next two years. When it comes to North American buyout funds, LPs see an even bigger advantage with nearly 90 percent expecting better terms and conditions.

Unsurprisingly, this mood is a big swing from the LP pessimism that prevailed in the summer of 2005 when the buyout boom that lasted into 2007 was picking up steam. Back then just 20 percent of LPs investing in North American buyout funds felt terms and conditions would improve for them over the 2006-2007 time period.

There is some good news for buyout GPs, however, as LPs said the strategy was the biggest contributor to their returns. More than 50 percent of LPs said they had achieved returns of 16 percent or more from their investments in North American buyout funds, the highest percentage for any of the fund types. Overall, 37 percent of LPs said they’d so far achieved returns of 16 percent or higher from the private equity asset class.

Distributions from GPs were a sore subject for LPs as roughly three quarters of those surveyed were forecasting deterioration over the next 12 months. Coller Capital said this was “the most gloomy’ mood for LPs since it began conducting the survey in 2004.