European LPs bullish on PE while North Americans pull back – report

Investors in Europe are seeking to broaden their portfolios in the next 12 months through new GP relationships, according to research from Rede Partners.

European limited partners are more enthusiastic about new managers than their North American counterparts, according to research by Rede Partners.

LPs in Europe expect “fairly strong growth in deployment to new managers” this year, with a score of 63 points, reported the placement agent and advisory firm’s 1H 2019 Liquidity Index, which measures changes of sentiment based on a numerical figure.

North American LPs expect to grow their deployment to existing GPs rather than make commitments to emerging managers, with the score for new relationships falling 16 points to 50.

A score above 50 shows an improvement in sentiment, while below 50 marks a decline and 50 indicates no change.

Scott Church, partner and co-founder of Rede, said North American investors have historically been strong supporters of new initiatives and spin-outs, and the change in sentiment is because such LPs had supported many new entrants into the market in recent years.

“On balance, it’s the Americans looking at their forward calendar and seeing that they have a heavy re-up agenda,” Church told Private Equity International. “So they need to hold capital to allocate to existing managers who have done well for them – while at the same time expecting distributions to slow. These factors combine to mean they will have less room for new managers.

“In terms of the evolution of the market, the US has seen a lot of spin-outs and new initiatives over the last decade. To some degree we always see trends like these a bit later in Europe, which is often a few years behind the curve. But backing emerging managers is a continuous process across both sides of the Atlantic. We are seeing a bit of a plateauing on the US side, while Europe still has some room to grow on new initiatives and spin-outs.”

Looking at investor type across the US and Europe, consultants and fund of funds managers were most bullish on new relationships, with 67 and 65 points, respectively. Insurance companies, family offices and pension funds were also positive on new manager relationships, scoring 60, 57 and 56, respectively.

The report also revealed a sharp downswing in sentiment across North American LPs, with expectations around deployment to primary funds dropping 13 points to 50.

Church attributed this divergence in investor attitudes towards private equity between the two geographic regions to an increased awareness of where we are in the cycle by North American LPs.

“We’ve had a very long bull run, over almost a decade of central bank and quantitative easing, from which a private markets have benefitted,” he said. “A lot of this softening in sentiment is simply tied to investors’ awareness of where we are in the cycle; and the fact that we have had a strong flow of distributions and a favourable exit environment. I think much of the slowdown we are seeing in the new RLI data is just a recognition of where we are in the cycle.”

Oregon State Treasury, which manages about $100.7 billion in assets across several pension funds including Oregon Public Employees Retirement Fund, warned in February of industry trends signalling signs of late cycle behaviour. These include quicker fundraising cycles due to an increasing tendency to pursue a two to three-year deployment pace than the conventional four years – “a trend reinforced by GPs’ perverse incentive to deploy the current fund quickly and raise the next fund before the market turns”, the LP noted in its Private Equity Annual Review and 2019 Plan.

European LPs, on the other hand, expect to deploy more capital to private equity in 2019 – showing a score of 64 points, compared with the previous 61. The move shows a form of stabilisation in the market following allocation adjustments made by LPs around Brexit uncertainty in the last year, Rede noted.

Last month the Local Government Pension Scheme Central, which manages about £40 billion ($52 billion; €46 billion) of assets for nine pensions based in the UK’s Midlands, established its debut private equity fund as part of its near-term plan to deploy more than £2 billion in private equity.

Investors in France were the most positive about primary fund deployments this year, with a score of 69, compared with 60 in H2 2018. Southern Europe, Benelux and UK LPs also expect growth in deployment: these markets had an increase in sentiment of about 4 points each, compared with six months prior.

Rede polled 152 LPs globally representing over €5 trillion in assets under management and over €800 billion of capital allocated to private equity.