Study: 84% of investors will not re-up with core GPs

Coller Capital’s latest survey found that LPs are keen to back first time funds and move away from established relationships.

Good news for hungry first time fund managers: 70 percent of North American LPs are planning to back a first time GP in the next two years, according to Coller Capital’s latest Global Private Equity Barometer.

Approximately 58 percent of European LPs plan to back a first time fund, while 53 percent of Asia-Pacific LPs expect to invest in debut funds, the study found.

However, the flipside is that a staggering 84 percent of LPs will refuse to re-invest with managers whose last two or more funds they backed.

LPs have a lot of choices these days, when it comes to the different funds in the market, Francois Aguerre, a partner at Coller told Private Equity International. “They can either go with a first time fund or they can back a GP where they face a generation transition issue.”

Effectively, there is significant risk in both scenarios, he said. “If the transition doesn’t work then the GP becomes quite unstable. Backing a first time fund is also risky, but maybe not as significant when you have a young, hungry team of professionals.”

LPs are looking to “regenerate the market” and “back people with an entrepreneurial mind-set” and trying to find “the winners of tomorrow”, he said.

Additionally, the study found that LPs are happy to consider alternative ways to invest in private equity. Almost a quarter of LPs backed GPs on a deal-by-deal basis since the start of the financial crisis, the study found.

What’s more, the relationship between LPs and GPs is also changing. More than 40 percent of LPs believe fund terms will improve in their favour in the years to come. Two-thirds of North American LPs would accept a lower hurdle rate for GPs in return for lower management fees, a view shared by just over 40 percent of investors from elsewhere in the world.

“If an LP is convinced a fund is going to make carry, giving a lower hurdle rate versus fees is a better deal for the LP, because it’s almost a free gift to lower the hurdle rate,” Aguerre said.

Furthermore, most European LPs now see good investment opportunities throughout Europe, except for France, the survey found. North American investors are more cautious about Europe, less than a third believe Southern Europe will offer good private equity opportunities in the next three years.

Investors also expressed concerns about the frothy credit markets in North America: two thirds of LPs believe an over-supply of credit is resulting in poor deals being financed and high-quality deals being over-leveraged.

While two-thirds of LPs believe weaker sentiment in emerging markets will hurt returns from existing funds in those regions, this will not deter them from strategic changes to their regional allocations.

In fact, the proportion of LPs with a tenth or more of their private equity exposure in the Asia-Pacific region will double over the next three years: to 38 percent for North American investors, and 29 percent for European investors.