Survey: LPs increased GP relationships in 2011

A majority of LPs in a recent survey said they increased their GP partnerships in 2011. Almost a quarter of respondents plan to increase their private equity holdings this year.

Despite the widely held view that private equity limited partners have been culling general partner relationships, a majority of private equity LPs in late 2011 said they had added managers during the previous 12 months, according to a recent survey from private equity advisory group Fimeris.

While LPs have been vocal in recent years regarding the need reduce their general partner relationships in a “flight to quality”, approximately 56 percent of respondents in the survey said they had increased GP relationships during the last 12 months, while 13 percent said they reduced the number of managers they commit to and 31 percent experienced no change.

“One might have expected investors instead to reduce the number of their relationships in today’s difficult markets given the smaller allocations and demands for re-ups,” the report said.

At the beginning of 2011, investors in the survey said they expected approximately 33 percent of their commitments during the year to be with new GPs and 67 percent with existing managers.

This should come as good news for GPs that plan to come to market with new funds this year in what is expected to be another challenging environment for fundraising. Still, LPs willing to commit to new funds will likely only partner with GPs who have proven track records of strong performance with stable investment teams.

Another surprising LP perspective from the survey pertained to the attractiveness of geographical areas for investment. More respondents considered the US to be the most attractive country than any other region, followed by China and Brazil. The findings represent a reversal compared to investor sentiment in 2010, when LPs in Fimeris’ survey chose China as the most attractive region, followed by the US.

“It’s difficult to tell [why], but it might be the case that there had been some press in the beginning of the year regarding some volatility in the public markets of China,” Ian Schuler, a managing director at Fimeris told Private Equity International.

“I think it’s no secret also that the housing market in China is a bit questionable and I think there’s a perception that it could result in some wider impacts given the overall contribution of the housing market and ancillary economy that supports the housing market.”

Still, the survey found that a significant amount of LPs are dissatisfied with the private equity asset class, as half of all “traditional investors” – investors excluding fund of funds and secondary funds – said they feel “not adequately compensated for the illiquidity risk that is assumed when investing in the asset class”, the survey said.

Roughly 66 percent of investors in the survey said they expect their private equity allocation in 2012 to remain “relatively stable”, while 11 percent said they would decrease their holdings and 24 said they would increase their private equity exposure.

In terms of industries, survey respondents said healthcare services was the most attractive sector, followed by energy and utilities and business services, chosen by an equal percentage of respondents as the second most attractive area of investment.

Fimeris’ survey used data from 113 investors from more than 15 countries with combined private equity allocations of over $50 billion, with 41 percent of respondents coming from North America, 42 percent from Europe and the remaining from other geographies.