Coller: LP appetite for private equity cools

Just 28% plan to increase their exposure to the asset class, down from 39% six months ago, the firm’s latest survey has found.

Fewer global investors are planning to increase their target allocations to private equity than in the last four years, a survey by Coller Capital has found.

While private equity remains attractive, the number of limited partners planning to increase their exposure to the asset class has fallen to 28 percent, the secondaries firm found in its semi-annual Global Private Equity Barometer for summer 2017, released on Monday.

The figure is down from 39 percent six months ago and had remained in the 30s since the end of 2013.

The survey results, which canvassed the views of 110 private equity investors from around the world, mirrors similar findings. A poll this year of 97 sovereign wealth funds by asset manager Invesco found rising competition and deal execution challenges were leading to a freeze in private equity allocations in favour of real estate.

More LPs are planning to commit to infrastructure, private debt and real estate strategies than private equity, Coller’s survey found.

The barometer also reveals LPs are finding it difficult to keep up with new private equity opportunities. This is most pronounced in Europe, with almost two-thirds of LPs believing they are changing too slowly to exploit new strategies, compared with just under half in North America and 43 percent in Asia-Pacific.

“Some European LPs haven't had as long an exposure to private equity,” Michael Schad, Coller’s head of investment management, told Private Equity International.

“A lot of European LPs are still more diversified than some of their North American counterparts. They're still less active in portfolio management and still have more active relationships on the go, which puts strain on the teams overall. On average, they've been less well-resourced than the American LPs for the opportunities that they're trying to cover.”

Such opportunities could include investments that need specific experience or skills that the LP doesn’t have access to, or new styles of investing such as co-investing, Schad said.

The majority of respondents said LPs should “hold firm” against any reduction in the hurdle rate, despite economic and market conditions. More than three quarters of LPs would consider some flexibility on the hurdle rate, suggesting GPs have some room to bargain if they offered concessions to LPs such as more favourable LPA terms.

LPs believe making changes within their organisations was key to improving private equity returns, the survey found. Two-thirds of investors said they believed changing recruitment and resourcing processes would have a “positive impact” on returns, with 60 percent highlighting the investment decision-making process, and half highlighting management and governance structures.

After high asset prices, LPs were most worried about macroeconomic volatility, with 83 percent of respondents noting economic and currency volatility was a significant risk affecting private equity returns. On Friday, the pound fell as much as 2.5 percent against the US dollar as the UK faced the prospect of a hung parliament, casting a shadow over the British government’s ability to provide further clarity on the Brexit process.