Survey: LP term concerns will prevent re-ups

In addition to poor performance, poor alignment of interests and corporate governance will make new commitments a harder sell for LPs, according to a survey of LPs from Coller Capital.

Limited partners will refuse to re-invest with existing managers in 2010 because of concerns over terms and conditions, according to a new survey from Coller Capital.

The growth of private equity as an asset class is inevitable in the long-term.

Jeremy Coller

The survey showed 79 percent of LPs will refuse to re-up with existing managers because of what they view to be unsound terms and conditions, compared to 57 percent in the winter of 2008-2009; 76 percent will refuse because of lack of transparency, versus 39 percent in 2008-2009 and 76 percent who will refuse to do so because of perceived conflicts of interest, compared to 51 percent in 2008-2009.

Many investors in the survey said poor performance has damaged perception of the asset class within their organisations. About half the investors in the survey from Europe and Asia report perception has been damaged, while about 28 percent from North America say the same thing.

“The growth of private equity as an asset class is inevitable in the long-term, but we should understand that for many LPs, now, private equity is a harder sell internally, and for all LPs, GPs now have more to prove,” Jeremy Coller, chief investment officer of Coller, said in a statement.

The survey, which included 108 private equity investors around the world, also showed that investors are anticipating a significant increase in capital calls in 2010. About 84 percent of North American LPs expect to see “a big uptick in GP drawdowns in the next 12 months”, the survey said. Along with capital calls, LPs also are anticipating more distributions next year, though improvement in the exit environment will be slight, the survey said.

Two-thirds of the respondents have changed the way they manage private equity as a result of the market downturn, with about half of the investors reporting they have increased their due diligence prior to committing to a fund.

LPs also see the secondaries market as the best way to generate liquidity, with 92 percent of LPs citing the need for liquidity as a reason for investors to sell in the secondaries market, compared with 27 percent in 2007.

Also, a majority of LPs do not expect to tighten restrictions on placement agents because of the pay-to-play scandal that has rocked the pension universe in the US.