Friday Letter No room for sentiment

A recent survey of institutional investors suggests the fundraising picture may not be as bleak as some negative sentiment would indicate.

On both sides of the Atlantic, economic growth (or the lack thereof) is a big talking point at the moment. In the US, President Obama's failure to deliver a bigger upturn in growth has become the centrepiece of Mitt Romney's election campaign. In the UK this week, the government has been struggling to deal with the fallout from some implicit criticism of its growth strategy (or the lack thereof) in a report on the subject by Tory peer Michael Heseltine (which the coalition government commissioned).

But whatever the politicians do or don't do, the current consensus is that most developed markets are in for a relatively flat few years as their governments and their consumers get their finances in order. To some extent, this sentiment is damaging in itself: without the prospect of some sunlit uplands on the horizon, businesses may be reluctant to invest. Insofar as that makes economic growth harder to achieve, there's a chance of a vicious circle developing.

Private equity managers are clearly affected by negative sentiment too. And while you can plausibly argue that a period of low growth may be good for deal-making (insofar as the absence of any imminent uptick keeps prices low and perhaps encourages owners to sell and/or yield a greater number of turnaround opportunities), it's much harder to take a glass-half-full attitude to the fundraising climate. Almost any GP who has recently been in (or is about to be in) the market with a new fund will tell you that it's incredibly difficult to raise money at the moment. And that's particularly true for European managers, since many LPs – especially those outside Europe – tend to take a very dim view of the region's prospects. These have become truisms of today's private equity market.

However, the picture may not be as bleak as some GPs appear to think. This week, Private Equity International got its hands on the latest research from CEPRES, an independent investment analysis platform, whose private equity market outlook report comes out next week. CEPRES found that despite all the negative noise, 92 percent of the LPs in its survey were planning to make new commitments in the next 12 months. And over 80 percent were intending to add new managers to their portfolio, rather than just re-upping with their old managers. What's more, hardly any of these investors were planning to decrease their allocation to private equity; in fact, a substantial proportion were planning to increase their allocations, including 40 percent of European LPs.

This may seem counter-intuitive. But in a low-growth, low-yield world, where stock markets are unlikely to stage much of a rally, investors are clearly still looking to private equity to deliver above-market returns. Indeed, just today the Private Equity Growth Capital Council released data showing pension funds' private equity investments outperformed other asset classes significantly. So however tough it is out there on the fundraising trail – and with the sheer volume of managers trying to raise money, some will surely fall by the wayside – there will be fresh capital for those with the right proposition.

One other notable point about the CEPRES research: the results suggest that it's not actually European managers who are the most bearish about fundraising. Nor is it North American managers. In fact, GPs from outside these two regions were far more likely to predict a deterioration in fundraising conditions over the next 12 months – perhaps because of increased competition, or simply the inevitable sense that at some point investor appetite will wane. That's particularly interesting given the research found that almost half of the capital LPs are planning to invest will go to regions other than Europe and North America; indeed, Asia was a more popular investment destination than either of those two. Another example, perhaps, where sentiment has outstripped reality.