A new report shows that private equity investors are keen to pour more money into the asset class following years of market-beating returns – particularly from large buyout funds. But with competition for deals and allocations intensifying, will this wall of money create a whole new set of problems?
Coller’s research also suggests that the industry’s investor base is becoming increasingly experienced. Three quarters have been investing in private equity since before 2000, so they are no strangers to the lean times. Chief executive Jeremy Coller believes this is also reflected in the predicted drop in allocations to fund of funds – the traditional access point for new entrants. He told PEO: “LPs often use funds-of-funds to gain access to areas where they do not have expertise, in order to broaden the diversity of their portfolios. The 30 percent of investors planning decreased allocations to funds-of-funds partly reflect increasing knowledge and experience in the LP community. But this move won’t necessarily be bad for funds-of-funds themselves – these particular LPs will doubtless be replaced by investors new to the asset class.”
Asia-Pacific LPs were also likely to remain important clients. Coller said: “Because so much of the private equity market is in the US and Europe, Asia-Pacific LPs have to invest more money outside their domestic markets in order to achieve a truly diversified portfolio. So it’s not surprising they find gatekeepers and funds-of-funds very useful.”
But the picture was not entirely rosy. For one thing, these record sums of money being invested are making LPs uneasy – nearly 90 percent are concerned that there will be too much money chasing too few deals, which is likely to drive down returns.
However, he feels the European venture is showing signs of recovery. “Confidence is higher among those who are actually invested in European venture, which suggests the sector still has an image problem in the wider LP community. However, the sector has learned a lot of lessons in recent years, so over time it should shake off its negative image.”
Team continuity remains a significant consideration, even though in recent years GPs have started to address this thorny issue. “Continuity and succession planning have been an important issue to LPs for some years, and they have articulated this issue clearly to GPs. For their part, GPs understand it and have responded,” Coller said.
Of course, not everyone is in a position to do this, Coller points out. “Across the investor universe, there are more LPs looking to increase the number of GP their relationships than to reduce it. But, for a few big players with large portfolios, focusing on top performers means making a smaller number of bigger bets.”
So big returns continue to drive bigger allocations – but unless LPs think global, the picture could be very different in the years to come.