Private equity market overheating?

Investors’ satisfaction with the best and worst performing areas of private equity is polarising, according to Coller Capital’s Global Private Equity Barometer. As a result, they expect that increasing competition for deals, together with problems accessing the funds of the top private equity firms, will limit future returns.

The Barometer indicates continuing growth in the private equity market, both in the next year and in the longer-term, however.

“Institutional investors are planning to throw still more fuel on the private equity fire . . . but not blindly,” said Jeremy Coller, chief executive of Coller Capital. “Investors are becoming more active in managing their portfolios – recognising and rewarding good GP performance, exiting underperforming relationships, and being willing to experiment with new GPs and new areas of private equity, in the hunt for superior returns.”

In the short-term, around half of LPs expect the pace at which private equity firms call down and return money to increase over the next year. Around the same proportion (52%) are intending to increase the overall number of their GP relationships during the year, with two-thirds planning new GP relationships.

The longer-term prospects for the market are also underpinned by investors’ intentions. During the coming year, around one-third of LPs plan to increase their allocations to alternative assets generally, and to private equity and hedge funds specifically.

On the other hand, some of the short-term growth in the market will be at the expense of the worst performing GPs. Almost half of LPs (45%) have refused to re-up with some of their current GPs in the last 12 months. Three-quarters of investors who terminate relationships with GPs do so to focus more resources on their best-performing managers.

European private equity represents the two extremes of investor satisfaction with returns from the asset class. Some 100% of LPs are either satisfied or very pleased with their returns from European buyouts in the past year, up from 87% six months ago, whereas more than half (54%) of LPs are now disappointed with their returns from European venture capital.

This polarisation is also reflected in LPs’ global rankings. LPs ranked the opportunities for investment by GPs over the coming year in the following order of attractiveness: European buyouts, Asia-Pacific buyouts, North American venture, North American buyouts, Asia-Pacific venture and European venture.

LPs from all regions believe the European buyout market offers the best short-term investment opportunities, although this optimism is tempered by a number of factors. Most investors are apprehensive about the level of competition for large and mid-sized transactions, and more than half are concerned about the number of club deals and about access to the best-performing funds.

Investors see Central and Eastern Europe as the most attractive area in Europe for GP buyout investments, followed by Germany, and, in third place, Spain.