Wall of money threatens bumper returns

Investors in private equity continue to boost their allocations, buoyed by record returns – but many fear the wall of money flowing into the asset class may have a detrimental effect.

Bumper returns from buyout funds continue to drive investors to increase their allocations to private equity, although many are worried that the wall of money now chasing deals will drive down these returns in the coming years, according to a new study.

About 45 percent of all private equity investors have achieved net returns of more than 16 percent per annum from their allocations, according to Coller Capital’s latest Global Private Equity Barometer survey. A similar proportion expects fund distributions to increase over the next year, as the exit environment remains strong.

As a result, just under half of all limited partners intend to increase their allocations over the coming year.

However, with most of this money flowing to buyout funds – where more than 60 percent of investors have seen returns in excess of 16 percent – investors are worried that this wall of money will impact returns. Just under 90 percent of respondents felt this was the biggest threat to the performance of large buyout funds – well ahead of any other factors. Spiralling management fees and reduced availability of bank debt were also cited as potential risks.

The survey also revealed that European LPs have under-performed their US and Asian counterparts, with a much smaller proportion reporting returns above 16 percent per annum. Coller suggested this could be largely due to European LPs’ over-exposure to European venture, the worst-performing segment of the private equity market in recent years.

Asia-Pacific buyouts is another area where European LPs’ returns have lagged behind. Coller said this was partly due to an under-exposure to the region, but also to a failure to get into the top-performing funds. Many US firms have enjoyed big successes in the region, including Ripplewood and Cerberus.

Chief executive Jeremy Coller said the results showed that diversification was key. “The Barometer underlines the importance of a proactive and globally-focused approach to the management of private equity portfolios – restricting investment to familiar or ‘local’ markets will not maximise returns,” he said.

Coller’s Global Private Equity Barometer is a twice-yearly survey of investor sentiment run by the UK-based secondaries specialist. The firm surveyed a randomly selected sample of over 100 investors from Europe, North America and Asia-Pacific.