Perspectives 2021: Seven LP opinions that matter

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2020 has been an unusual year, to put it mildly. What started off ordinarily enough turned on a dime when the coronavirus pandemic swept across the globe at the end of the first quarter, causing not only a global public health emergency but severe economic hardship for many.

And it’s showing no signs of letting up. At the time of writing, case numbers were beginning to spike again in both the US and Europe, with new lockdowns coming into effect and causing renewed fears for economies.

Private equity has not escaped unscathed. While fundraising numbers remain robust, it’s been tough for all but the most familiar household names to raise capital. Some portfolio companies have been boosted by a “covid bump” while others – such as those in the travel and hospitality industries – have been devastated. All have been forced to grapple with new ways of working. And that’s not all. The industry – and the world at large – has also been wrestling with an increasingly acute climate crisis and escalating geopolitical tensions. The only certain thing about the outlook for 2021 right now is uncertainty.

That’s where Private Equity International’s LP Perspectives 2021 Study, one of the most comprehensive of the private equity investor universe, comes in. For this year’s study, PEI’s Research & Analytics team surveyed 100 institutional investors to find out what’s driving them, what’s worrying them and how they see the future of the asset class.

Seeking a step-up on climate change

Just over 40 percent say GPs are taking the risks of climate change seriously enough in their own investment policies and practices, while 22 percent indicate they are not doing so. Climate change has become an increasingly hot-button issue among the LP community, particularly in the last year, and we anticipate investors keeping up the pressure on their managers throughout 2021.

Recession becomes a reality

Top of mind for LPs right now when it comes to what could impact performance in the next 12 months is recession in core markets, which should come as little surprise given the volatility of public markets and the increasing certainty that the effects of the pandemic will be felt well into next year. Next in line is the covid-19 outbreak, followed by extreme market valuations. Concern around the US-China trade war has dropped this year, likely as a result of coronavirus worries taking over.

Enthusiasm cools on emerging markets

Investors are showing increased appetite toward the more established private equity markets of North America, Western Europe and Asia-Pacific over emerging markets. The enthusiasm for Asia-Pacific in particular is perhaps a reflection of that region’s economies being further along in their recoveries, and thus far not facing widespread second waves of the covid-19 pandemic. On KKR’s third-quarter earnings call, for instance, the firm credited its relative weighting to Asia as benefiting its performance.

A tale of two 2020s

As unintuitive as it may seem in a downturn, investors have more confidence that private equity will exceed its benchmark next year than they did at the end of 2019: 39 percent expect outperformance in the next 12 months, up from 23 percent last year. However, there has also been an increase in those that expect it to fall below its benchmark – 16 percent compared with 11 percent the year prior. Consequently, those indicating it will meet its benchmark has shrunk by 17 percentage points. This may be a reflection of the very different experiences investors have had this year depending on the make-up of their portfolios: those with high levels of tech exposure have likely seen an uptick in value, while those with high exposure to retail, leisure and energy have had a much tougher ride.

LPs have second thoughts

There’s been a slight uptick in the percentage of respondents planning to buy or sell fund stakes on the secondaries market in the next 12 months: 20 percent intend to both buy and sell, while 22 percent plan to just buy. Despite the expectation of an increase in forced sellers caused by a downturn, the proportion looking just to sell – 7 percent – is down from 12 percent last year. Those looking to buy could be seeking to increase exposure to managers that are benefiting in today’s environment, while taking advantage of potentially softer pricing.

ESG is non-negotiable

Just 12 percent of LPs are willing to relax their ESG policies as it relates to private markets fund investments in light of covid-19. In fact, from our conversations with the market over the past few months, ESG considerations are more important than ever as GPs and LPs seek to ensure their portfolios are as financially sustainable and future-proof as possible.
Another finding we’ve seen playing out in the data: just over half are less likely to invest with new GPs. This is likely down to a desire to stick with the tried-and-tested during times of distress, as well as the practical difficulties of conducting due diligence on new managers remotely.

Built to last

Private equity investors are pretty happy with how their GPs have been structuring their deals: 72 percent indicated they were at least somewhat confident deals had been structured sensibly enough to withstand the downturn. This compares favourably with the other asset classes surveyed as part of the study. This may be driven by how well private equity portfolios have held up thus far, aided by government interventions, persistently low interest rates and a rapidly recovering (although still volatile) public market.