Fundraising slows as investors' concerns grow

Jeremy Coller says the slowdown in distributions is forcing investors to focus, and most of them are worried by any strategic drift in GPs’ hunt for deals.

Private equity managers looking to raise fresh capital to invest are in for a much tougher ride, according to Jeremy Coller, chief investment officer and founder of Coller Capital.

Jeremy Coller

Although deal volumes have dropped violently since the problems in global credit markets hit, fundraising has so far appeared to continue unabated. However, a slowdown in exits from funds is now beginning to affect the capital available for new fund investments.

Speaking at the launch of the Coller Capital’s latest Global Private Equity Barometer, Coller told PEO: “The fundraising environment is getting tougher. Pension funds are becoming cash constrained. They had been keeping commitments high and now they are seeing very little back by way of distributions. If you have a short track record or weak performance, you will struggle. Even good funds will be out for longer.”

Investors will struggle to overlook underperformance. Coller said:  “In the good times it’s been pretty easy for investors to write a cheque and to watch the money roll in. It almost didn’t matter who you gave the cheque to. The dispersion of returns between good and bad GPs now will be more significant. LPs will want to focus resources on good managers more than ever.”

Investors may also take a dim view of strategic drift, he warned. Three quarters of institutional investors in private equity are worried that private equity fund managers will stray into strategies or geographies where they lack expertise, according to Coller’s survey. North American LPs see the danger as particularly acute – 84 percent of them perceive “strategy drift” as a risk to their returns.

Investors are aware that their own growing appetite for the asset class is partly to blame: well over a third of LPs or 38 percent are planning to increase their allocations to private equity over the next year with only three percent planning a reduction.

Strong returns will also continue to attract new investors to the asset class, investors think – four out of five existing investors expect a significant influx of new LPs over the next three years.

Investors believe growing institutional appetite for the asset class will increase the premium on investor talent – 77 percent of current investors see the market for LP skills becoming significantly more competitive over the next three years. In fact, half of LPs even expect institutions to increase their recruitment from private equity firms as the “talent war” intensifies.

The best opportunities in private equity in the coming year will be in small and medium-sized European buyouts, LPs think. The lower end of the buyout market is expected to be attractive everywhere – especially for small (less than $200 million) and mid-market investments (deals of $200 million to $1 billion).

In today’s climate, investors see the most attractive opportunities for GP investment in sectors with long-term growth potential – healthcare and technology, for example. Sectors most at risk from economic downturn – like real estate and consumer industries – are considered less attractive.

This may create opportunities for Coller. He said: “Investors are facing new economic realities and they will be thinking about whether any changes need to be made to their portfolios.”

The prospect of a prolonged downturn is reflected, too, in a stronger preference for distressed debt. Over a quarter or 28 percent of Asian LPs and almost a fifth of European LPs plan to begin investing in distressed debt for the first time in the next 12 months.