Two-fifths of LPs grapple with denominator effect – report

Only 27% of LPs plan to increase their allocations to private equity over the next 12 months, down from 42% six months ago, according to Coller Capital’s latest barometer.

More than two-fifths of LPs say the denonimator effect will have a negative impact on their private equity commitment pacing, according to Coller Capital’s latest Global Private Equity Barometer.

Some 42 percent of investors said a mismatch in the weighting of public and private equities is likely to reduce their commitment pacing over the next one to two years. Two-thirds of LPs with AUM of over $20 billion and public pension funds reported the denominator effect as being a factor in the slowdown in their commitment pace.

Thirty-six percent of North American LPs said private equity’s attractiveness has improved versus public equity in today’s volatile environment. This figure climbs to 52 percent for Asia-Pacific LPs and falls to 28 percent for those in Europe. Conversely, 11 percent of North American LPs and 7 percent of Europeans said the asset class had become less attractive.

Only 27 percent of LPs plan to increase their allocations to private equity over the next 12 months, down from 42 percent in Coller’s Barometer Summer 2022. Some 14 percent plan to reduce their allocation, up from 6 percent six months ago.

Almost two-thirds (61 percent) of Asia-Pacific LPs believe that although their private markets portfolios are well positioned in the context of today’s environment, they would benefit from further modifications, the report said. Some 40 percent of North American investors and 28 percent of European investors said the same.

Of those LPs considering portfolio tweaks, 63 percent said they were considering changes by both investment stage and by sector. Meanwhile, 59 percent will consider modifying their portfolios by asset class and 55 percent by geography.

Those who do plan to modify their portfolios may do so via organic allocation changes across different private markets asset classes and through the secondaries market, Hani El Khoury, a partner at Coller Capital, told Private Equity International.

“Some LPs might think their exposure to technology and VC is large and they would like to manage that, but going forward they want their allocation to be more overweight into defensive strategies like credit or potentially secondaries,” El Khoury said. The secondaries market is also a solution “whether it’s an outright sale or a structured solution to give LPs the additional capacity they want to participate in the allocations of funds that are raising in 2023 and 2024,” he added.

Indeed, just over half of LPs plan to utilise the secondary market in the next two years as a buyer, a seller, or both – with one-in-five LPs planning to buy and to sell assets.

The macroeconomic environment is seen as the most significant risk to private equity returns across the next two to three years, followed by inflation. Sixty-eight percent of LPs are worried about the impact of high asset prices on private equity returns, down from 92 percent of LPs in Coller’s Winter Barometer 2019-2020.

“The risk from high asset prices has dramatically decreased,” El Khoury said. “For the buyer community, there is an interesting window or an interesting and attractive entry point coming towards us.”