Coller Capital’s barometer in five charts

Investors still have a strong appetite for private equity despite concerns about debt and the funding of weak managers.

Coller Capital on Monday published its latest Global Private Equity Barometer, a biannual snapshot of global trends in the industry.

It surveyed 110 investors, 40 percent from Europe, 40 percent from North America and 20 percent from Asia-Pacific and the Middle East. One quarter had assets under management of more than $50 billion, with banks/asset managers (25 percent), public pension plans (23 percent) and insurance companies (14 percent) comprising the bulk of respondents.

“LPs still see private equity as an area where they can generate good returns in an environment where valuations are high and there is competition for assets across all markets,” Stephen Ziff, partner and co-head of investor relations at Coller, told Private Equity International.

Some of the key takeaways:

  1.  LPs are still sold on alternatives

Limited partners’ appetites for alternatives remains strong, although there is divergence between those from North America and Europe. While 48 percent of European LPs are planning to increase their allocation to private equity over the next 12 months, only 26 percent of North American LPs are planning to do the same. As for European LPs, 2 percent plan to reduce their exposure, compared with 5 percent in North America.

“We’re at a point in the cycle where mainland Europe is, on a relative basis, seen as more attractive,” Ziff said. “That wasn’t the case four years ago. Notwithstanding what is happening in Germany, we’re in a period of increased political stability and that is coming through in LPs’ views.”

2. Direct investment has reached a plateau, while co-investments are up

The number of LPs planning to make direct investments in private companies has levelled off, after jumping to 30 percent from 17 percent between summer 2006 and summer 2012. Co-investments have similarly increased in popularity: the number of LPs making co-investments has more than doubled since summer 2006 to 55 percent.

 

3. LPs return expectations are down over the medium-long term 

Almost two-thirds of respondents believe private equity returns will decrease over the next 5-10 years in line with the market’s growing maturity, with only 7 percent believing the opposite. Looking at the next 3-5 years, 65 percent of LPs expect their private equity portfolios to grow by 11-15 percent per year, 17 percent by more than this amount and 18 percent by less. Strongest growth is predicted in North American venture capital, where 35 percent of respondents expect annual returns of 16 percent or more.

4. Debt is a concern for many LPs, especially in Europe

In Europe, 63 percent of LPs believe  an over-supply of debt is leading to the financing of poor buyouts or the over-leveraging of good ones, with a majority of North American LPs also viewing this as a problem. The issue is less pressing among Asian investors.

5. LPs plan to increase the number of managers they commit to…

…while almost 90 percent believe that too many weak GPs are receiving funding. Half of the LPs surveyed plan to increase the average size of their commitments, with 40 percent saying they are likely to increase the number of managers they employ over the next three years.

– Adam Le contributed to this report.