LPs with performance-related pay outperform

Investors with schemes in place to reward good performance have netted annual returns of 11% or more over the last five years.

Private equity investors who have adopted performance-related schemes for their investment staff have outperformed since the financial crisis, finds Coller Capital’s Global Private Equity Barometer.

Fifty-five percent of LPs with performance-related pay have netted annual returns greater than 11% over the last five years; less than one-fifth (19 percent) of other LPs respondents achieved the same. The practice is more common in North America, the study found, with 63 percent of respondents noting they had performance-related pay schemes; that compares to 53 percent in Europe and 48 percent in Asia-Pacific.

The study also revealed tentative signs of optimism among investors, with four out of five LPs expecting net private equity returns of 11 percent and more over the next three to five years. Over one-quarter expected returns in excess of 16 percent in the same period.

That is possibly what’s prompted one-third of investors to consider increasing their target allocation to private equity over the next 12 months, with a similar proportion willing to boost their commitments. They were three times as many as those planning to reduce their exposure to the asset class, with North America and Europe taking over Asia-Pacific as the most attractive areas for buy-outs.

Yet LPs underlined that resilient problems, as well as discrete challenges, continued to cast a cloud on all private equity markets.

Concerns about debt prevailed in Europe, with just over half of respondents thinking that promising buyouts may not materialise in the next two to three years due to a lack of sufficient financing. Almost two-thirds of LPs also expects a number of portfolio companies to hit a “refinancing wall”, with the occurrence of buyout default expected to rise over the same period.

The picture was different in America, where investors saw the scarcity of deals and increased competition among fund managers as the main reason to worry. Two-thirds of North American LPs thought there were too many GPs chasing too few deals, compared with one-third of European LPs.

Investors were most downbeat about prospects in China, however. Three times as many LPs thought the risk/reward ratio was deteriorating in the country. Such concerns induced LPs to grant increasing attention to nascent Asian markets such as Indonesia and Vietnam, with signs of fatigue for the more established markets of Australia, Japan, Korea, India and China.