Survey: LPs not very interested in new relationships

A majority of LPs will be looking to maintain their allocation levels to private equity, or even decrease those levels, and most will only have a limited interest in meeting new GPs, according to a survey from Probitas Partners.

Next year, most limited partners will be looking to simply re-up with existing GPs with a limited view toward new relationships, according to a recent LP survey from placement firm Probitas Partners.

The survey, Investor Appetite Approaching 2011, included more than 180 respondents from institutions like funds of funds, public pensions, superannuation funds, endowments and foundations, consultants and advisors and sovereign wealth funds.

A large majority of respondents, about 62 percent, said their major focus in 2011 would be on “evaluating re-ups with current GP relationships with a limited look at new relationships”. That’s compared to 24 percent of respondents who will be looking for new relationships next year.

“It will be difficult next year for new GPs to establish new relationships,” said Kelly DePonte, partner with placement agency Probitas Partners.

Many of the respondents, 41 percent, said they were already at or over their target for private equity and would be looking to maintain that allocation level or decrease it next year. However, about 28 percent of respondents reported they were under their target allocation and were committed to meeting that target next year.

Even for GPs with lengthy track records, this means existing LPs may not be cutting as big checks next year as in the past. “A number of investors are at their allocation levels now, and they have re-ups coming in 2011,” DePonte said. “If they put the same amount of money into a fund [as a prior fund], it would bust their allocation.”

For many LPs, the focus next year will be on growing exposure to US mid-market buyout funds, ranging between $500 million and $2.5 billion in size, and growth capital funds. Mega-funds likely won’t see much interest on the part of LPs next year, according to the survey, with only 5 percent reporting interest in funds at $5 billion or larger. Interest in secondaries funds could be tepid in 2011, with about 13 percent of respondents planning to focus on making commitments to the strategy.

A large majority of LPs believe the most attractive emerging markets are China and Brazil, followed by India and Southeast Asia.

Responders showed marginally less interest in direct and co-investments from last year, with 42 percent reporting they do not engage in direct or co-investment activities, up from 38 percent last year. For large institutions that can put to work $1 billion or more, direct and co-investments are probably desirable because they are more likely to have teams in place that can perform proper due diligence on potential deals, DePonte said. That’s just not the case for smaller organisations that have to rely more on the word of the GP.

“People who take co-investments from GPs often regret it. You may pay less in fees but the GP may be trying to diversify risk on questionable investments,” DePonte said.