Not All LPs Convinced Of PE Virtues, Survey Finds

More than four in 10 (43 percent) respondents from endowments and foundations, among the most aggressive allocators to alternative investments, said that “influential” colleagues believe their allocation to private equity should be reduced or eliminated. The same goes for more than a third (37 percent) of the respondents working at public pensions, the biggest suppliers of capital to the asset class.

Secondary buyer Coller Capital, based in London, conducted its latest “Barometer” survey in February and March. It is based on a survey of 140 LPs based in Europe (42 percent), North America (37 percent) and the Asia-Pacific (21 percent). Just under a third (30 percent) are banks or asset managers, followed by public pension funds (14 percent), insurance companies (13 percent) and endowments and foundations (10 percent). More than a quarter (27 percent) have $50 billion or more in assets under management, while another 17 percent have between $20 billion and $49.9 billion in assets under management.

The results also included some other troubling signs for sponsors. Returns have been dropping—fulfilling predictions by many buyout professionals who have been publicly warning investors of this inevitability for years. In 2007 almost half (45 percent) of LPs said that their portfolios had achieved net returns of 16 percent or more; today that percentage is down to 13 percent. About half of respondents in the latest survey peg their private equity returns at between 11 percent and 15 percent.

Meantime, nearly a third (30 percent) of respondents said they’ve been slowing their pace of private equity commitments in response to the large number of unrealized investments in their portfolios. One in 10 said they are responding by selling interests in private equity limited partnerships on the secondary market. Particularly out of fashion right now, according to the survey, are large buyouts funds doing deals of $1 billion or more (nearly nine in 10 respondents said they would “probably not” accelerate their pace of commitments to these funds in the next two to three years) and funds managed by publicly traded firms (two-thirds of respondents said going public makes a fund “less attractive”).

At the same time the report held out plenty of good news for sponsors, who by and large have proven that they can outperform the public equity markets across several decade’s worth of economic cycles. Two-thirds of respondents said their GPs have improved the operations of their portfolio companies to a “significant extent” since the financial crisis while another 32 percent said they did so to a “minor extent.” Overall, about one in four respondents said they planned to boost their target allocation to private equity over the next 12 months, far more than the estimated 15 percent that plan to reduce their target allocations.

What kinds of investments are particularly in favor with investors right now? Here are the main findings:

  • Well more than half (58 percent) of respondents said they expect “attractive” opportunities in the next two years to buy companies from bankruptcy situations in Europe and North America.
  • More than a third (34 percent) said they expect to up their percentage of assets targeting credit investments in the next year, while half say they have either recently committed to or are considering a commitment to a private debt fund.
  • Three-quarters of respondents believe Europe will produce “attractive” opportunities in the next one to two years, although most of those see the opportunities limited to “certain parts” of Europe; more than half of respondents have exposure already to private equity markets in China and India, while just under half have exposure to Australia, Japan and Korea.