Study: LPs to increase private equity allocation(2)

Although just about half of the LPs in the study have had difficult conversations with GPs about performance, nearly two-thirds said private equity is performing better than other investments in their portfolio.

Good news for GPs on the fundraising trail: LPs are optimistic about private equity and are planning to increase their allocations to the asset class in the coming year.  

Nearly two-thirds of investors, interviewed for Duff & Phelps’ Alternative Investments Outlook 2013: Limited Partner Survey, said private equity is performing better than other investments in their portfolio. Approximately half of the respondents said private equity is beating their expectations. 

The financial advisory and investment banking firm quizzed 100 LPs operating in Western Europe and North America. Two-thirds of them plan to reconsider their allocation to private equity in the next 12 months, 95 percent of which plan to increase their allocation. 

“I expect a private equity investment boom is on the cards. We have already identified many funds in the US and Europe for new investments,” one US pension fund official said in the study. 

We think it’s a brave soul [that is investing in Southern Europe]. There are a lot of structural problems around bank debt, corporate debt and household debt in Spain

Di Valmarana

Nevertheless, 48 percent admitted they have had difficult conversations with GPs about fund performance, with many LPs expecting returns on 2012 investment vintages to fall below levels achieved in the past. 
In fact, 91 percent of respondents said they have been more vocal about fund investment strategies in the past 12 months. When allocating capital, transparency was named as a key concern by 70 percent of LPs. 

Within Western Europe, the Germanic countries were the most popular with investors. The economic environment, political uncertainty and price expectations remained the biggest concerns for LPs investing in the region. In addition, European investors were more optimistic about Southern Europe than their North American counterparts, the study showed. 72 percent of European LPs said they would be likely to invest in funds with exposure to Southern Europe, compared to only 40 percent of North American investors.  

“Countries like Greece, Spain and Italy are very unsafe for private equity investments and we are not considering any investment,” a vice president at a US pension fund said in the study. 

But it is not just American LPs that remain wary about Southern Europe. Francesco Di Valmarana, a partner at Pantheon Ventures, expressed similar concerns in a recent interview with PEI. 

“We think it’s a brave soul [that is investing in Southern Europe]. There are a lot of structural problems around bank debt, corporate debt and household debt in Spain,” he said. Italy has great companies, but there also is still too much political risk in Italy, according to Di Valmarana. “Are the Italians serious in reducing the levels of bureaucracy? We don’t see a lot of progress on this, so I think it’s hard to be overly optimistic,” he said.