LPs look to directs as fund returns fall

A majority of LPs' private equity programmes now have lifetime returns of less than 11%, according to a survey from Coller Capital.

Fifty one percent of limited partners (LPs) now have lifetime portfolio returns from private equity of less than 11 percent, down from 22 percent in 2008 and 29 percent in 2009, a survey has revealed.
However, according to Coller Capital’s latest Global Private Equity Barometer, LPs still have confidence in the asset class with 20 percent of LPs surveyed planning to increase their exposure to private equity, as compared to 13 percent who plan to reduce their allocation. The remaining 67 percent plan to maintain their allocation levels.

This marks a return of confidence in the asset class since the survey in June 2009, when a higher proportion of investors wanted to reduce rather than increase their allocation to private equity (20 percent compared to 15 percent respectively).

This latest survey also shows LPs from around the world are making big changes to their private equity allocations in response to the new economic realities and the falls in the overall returns from private equity. 
Part of this is taking the form of investors accelerating their direct investment programmes. Currently, 49 percent of LPs make investments directly and half of these do so on a proprietary basis and not just through co-investment programmes. Forty one percent of all LPs plan to expand their direct investment into private companies over the next three years. 
This is primarily because LPs who have decided to stay in this asset class post the credit crisis have increased sophistication and have built up good knowledge about private equity, according Hiro Mizuno, partner and head of Asia at Coller Capital. Furthermore, as a result of GPs' need to use more equity in times of lower leverage, GPs are inviting LPs to co-invest. 
“GPs are more encouraged to co-invest with LPs and LPs have built up enough expertise to consider direct investments,” Mizuno told PEI Asia.
Another continuing trend is the rising popularity of the Asian private equity markets. Investors from across the world are planning big increases in their exposure to Asia-Pacific. The number of European LPs with more 10 percent of their private equity exposure in private equity will increase from the current 16 percent to 38 percent within three years. For North American LPs, the number will increase from 26 percent to 41 percent. Similarly, 87 percent of Asian LPs will have more than 10 percent of their private equity portfolio based in Asia, up from 69 percent currently.
Within Asia, LPs view Australia as the most important destination for buyouts, followed by China. Japan comes in at number six, after other markets such as India, Taiwan and Korea. In the venture capital and growth capital segment, China is viewed as the most attractive market, followed by India. Here too, Japan is the least attractive among the major Asian markets.
The interest in China and India translates into 53 percent of those LPs surveyed wanting to either begin or increase investing in China and 44 percent planning the same in India, the survey noted. Japan is the only regional market where a larger proportion of investors (14 percent) plan to decrease or stop investing than starting or expanding investment (12 percent).  
“This is a very clear signal coming from LPs that they have been disappointed with the performance of Japanese private equity funds,” according to Mizuno. However, he added that most LPs investing in Asia already have relatively large allocations to Japan as compared to other markets, so some of the desire to reduce .
The barometer surveyed 110 private equity investors from all over the world.