LPs favour mid-market buyouts and secondaries – report

Approach ranked first ahead of other strategies among LPs' long-term preferences, according to a survey by Montana Capital Partners.

Mid-market buyouts remain a perennial interest to institutional investors amid a heady mega-fundraising environment.

According to Montana Capital Partners Annual Investor Survey 2019, 90 percent of family offices and foundations and 85 percent of institutional investors are selecting the strategy.

“Many LPs like the mid-market, they know that a lot of mega-funds have outgrown the space. There are fewer companies worth above $1 billion than there are worth between $100 million and $1 billion. There are much larger opportunities there with the sheer number of companies,” Karl Adam, managing director of placement firm Monument Group, told Private Equity International.

Adam added that the mid-market has also been somewhat “less competitive”, at least historically, which is why LPs have been drawn to it and why there have been “so many fundraisings of mid-market funds in the last five years”.

GPs that have capitalised on LP demand for the mid-market include CVC Capital Partners, which last month raised a $1.6 billion tech-focused fund that will make investments of between $50 million and $20 million in US and European companies. Providence Equity Partners and Blackstone also have vehicles dedicated to the mid-market.

Secondaries, meanwhile, is LPs’ second most favoured strategy, with 66 percent of family offices and foundations and 51 percent of institutional investors expressing a long-term strategic preference for the sub-asset class. Nearly all respondents are investigating secondaries funds as a strategy to benefit from a change in the market cycle, the report noted.

Similar to previous years, LPs reported a large and increasing allocation to private equity, with 74 percent of family offices and foundations allocating more than 10 percent of their capital, and 34 percent allocating more than 20 percent.

Among institutional investors, 60 percent of respondents this year have invested more than 5 percent of their capital in private equity, compared to 40 percent last year, the report found. Within this group, investors are shifting to higher target ranges – 27 reported a 6-10 percent allocation (versus 17 percent last year), and 32 percent an allocation of more than 10 percent (23 percent last year). Meanwhile, 38 percent of institutions (58 percent last year) have an allocation of 1-5 percent.

The ever-growing appetite for the asset class is due to its return potential and resilience during tough times, Montana noted in the report.

An investor from a multifamily office in Switzerland commented in the report: “Stock markets are at an all-time high, real estate valuations are really high too, and returns on bonds are very low – this drives family offices into private equity, which has the highest expected return.”

Montana received 119 responses from investors globally from August to September, including family offices and foundations, insurance companies, pension funds, corporate pension funds, asset managers and banks.