Perspectives 2018 Europe: Ahead of the game

European LPs have been happy with their PE performance, but take nothing for granted, writes Sam McMurray

In terms of investor satisfaction, European LPs top the global rankings for private equity, according to the PEI LP Perspectives Survey 2018. Private equity portfolios outperformed investor benchmarks for 40 percent of the European LPs surveyed, with only 9 percent saying that performance fell below expectations.

This was notably higher than in North America, where 29 percent had benchmark beating returns or Asia-Pacific where the figure was 30 percent. Investors in Europe are also more confident than North American LPs about the next 12 months, with only a quarter of respondents expecting a dip in performance, compared with 36 percent across the Atlantic.

When it comes to target allocations to private equity strategies, European LPs – like their counterparts in North America – are most likely to increase capital available to distressed opportunities: 22 percent plan to do so. But they are far less likely than Asia-Pacific or North American investors to reduce target allocations to funds of funds.

Venture capital strategies are less popular than elsewhere with 12 percent of European investors planning to decrease their exposure.

European LPs share the same top three macro concerns as their North American peers – extreme market valuations, rising interest rates and the increased availability of leverage.

On the latter point, LPs may be taking some comfort from the increasing prevalence of cov-lite and cov-loose loans, which would potentially allow sponsors greater flexibility to remain in control of investments during periods of stress.

Waymond Harris, investment director at Blue Cross Blue Shield of Michigan, told sister publication Private Debt Investor the increase in risk-taking and leverage in recent years is still not comparable with pre-crisis levels. He added it is normal to have an increased awareness of downside risk at this stage in the cycle.

Our survey found that Western European investors are less likely to be under allocated to private equity than their North American and Asia-Pacific peers, with 26 percent considering themselves below target. In line with the global average, 31 percent of European investors felt it had been harder to source investable private equity opportunities over the past 12 months.

Co-investments are more popular in Europe: 32 percent of LPs have a defined allocation of capital for co-investment – higher than in Asia-Pacific (27 percent) or North America (17 percent). A further 45 percent would enter co-investments opportunistically.

At the recent PEI Co-Investment Roundtable, Debevoise & Plimpton partner Kate Ashton noted that a growing number of European sovereign wealth funds are demanding such opportunities.

Only 11 percent of European investors have a defined allocation to direct investment, which is lower than the global average. Of European respondents, 27 percent found venture capital opportunities easier to source over the past 12 months and just 5 percent more difficult.

This contrasts with North America where 45 percent of LPs found venture funds harder to come by.