‘Hard’ Brexit weighs heavily on LPs

More than a third of limited partners believe a hard Brexit would lower European private equity returns, a survey finds.

A “hard” Brexit would have a damaging effect on the economic prospects of both the UK and the EU, limited partners say.

Almost three quarters of LPs believe a “hard” Brexit – a decisive separation of the UK from the EU involving significant restrictions on the UK’s access to the EU single market and strong immigration curbs – would have a negative impact on the UK, and 64 percent believe it will negatively impact the EU, according to Coller Capital’s Global Private Equity Barometer Winter 2016-17, which polled 110 private equity investors globally.

“The LP responses are indicating that there are few winners in the event of a hard Brexit from an economic perspective,” Coller partner Stephen Ziff told Private Equity International.

More than a third – 37 percent – of respondents believe their European private equity returns would suffer as a result of a “hard” Brexit, while just 6 percent indicated they thought it would have a positive effect on returns.

However, the majority did not indicate that a “hard” Brexit would have a positive or a negative effect.

“Private equity has shown itself to be an asset class that can often make good returns in times of dislocation and high levels of volatility in markets,” Ziff said.

“There may well be a number of LPs who think that the fallout from a hard Brexit is actually an opportunity for GPs to deploy capital well.”

One third of public pension plans and insurance companies predict their organisations will miss their overall investment target returns in the next three to five years, unless there is significant change in their economic environment or operating model.

However, LPs are still confident that private equity can deliver: more than three quarters of LPs expect net annual private equity returns of more than 11 percent over the next five years.

“The number of LPs expecting PE to deliver more than 11 percent has been fairly consistent post the global financial crisis,” Ziff said.

Almost 40 percent of private equity investors expect to increase their allocation to alternatives overall in the next 12 months, with infrastructure proving the most popular; 47 percent expect their target infrastructure allocation to rise, and just 4 percent expect it to decrease. This was followed by private equity, with 39 percent expecting to increase their allocation, and real estate, with 38 percent.

However, hedge funds are continuing to fall out of favour, with 27 percent expecting to reduce their organisation’s target allocation, compared to 16 percent of respondents in the Winter 2015-16 Barometer.

What’s more, two-fifths of respondents expect to reduce or cease their exposure to hedge funds over the next 3-5 years, compared with 13 percent of LPs that expect their institutions to start or increase investing in the asset class.