Poll: Amid Challenges, Private Equity Investors Are Cautious

Private equity investors foresee major challenges for the industry over the next few years and are cautious about investing too heavily in the asset class, according to Coller Capital's latest Global Private Equity Barometer. 

(December 12, 2011) — The Eurozone’s sovereign debt crisis is burdening the ability of private equity firms to conduct deals, causing some investors to reject requests to reinvest in funds over the next 18 months, a survey conducted by private equity firm Coller Capital has found.  

The findings portray the latest evidence that buyout firms face an increasingly difficult fundraising landscape. The study showed that one in five investors plan to lower their exposure to European private equity as a result of the continent’s debt crisis. An additional 69% said they would maintain their current levels of exposure to Europe. A total of 11% said they would increase their investments.

In signs that the fundraising environment will remain challenging, 93% of the world’s private equity investors expect to reject some ‘re-up’ requests from their general partners (GPs) in the next 18 months, Coller Capital’s survey showed.

The firm found that fundraising challenges are exacerbated by the pressure on limited partners to delay the commitments they do make. 

Despite the challenges, the survey found that 83% of investors plan to maintain or increase their target allocations to private equity over the next year, a sign that investors are focusing more on reducing the number of relationships with managers as opposed to simply lowering their allocation. Over two thirds of North American limited partners (LPs) share this view – and their 3-5 year return expectations for private equity have almost returned to pre-crisis levels. Meanwhile, one-third of LPs expect returns of 16% or more from their private equity portfolios; half of LPs expect returns of 11-15%.

Commenting on the findings, Jeremy Coller, CIO of Coller Capital, said: “Some people might be surprised that private equity investors are optimistic about returns when they see so many challenges facing the industry. I think the explanation lies in another of the Barometer’s findings: 93% of Limited Partners believe private equity investment results in healthier businesses. In investors’ eyes, the industry’s returns are underpinned by its ability to strengthen and add value to the companies in which it invests.”

Coller Capital polled 107 private equity fund investors, 40% of whom were located in North America, 40% in Europe and 20% in the Asia-Pacific region. In terms of assets under management, respondents ranged from under $500 million (16%) to $50 billion+ (18%). The majority of respondents (30%) were bank/asset managers, followed by public pension funds (13%) and endowments/foundations (13%).

In response to the study, Thomas Lynch of consulting firm and alternatives specialist Cliffwater told aiCIO: “Private equity needs a reasonable amount of economic and capital market certainty to work. Since Q1 2009, the private equity market has been growing more or less like a typical cycle with more deals and more distributions each quarter. However, the European Sovereign Crisis that began in June has caused a real pause in the cycle,” adding that buyout firms are reluctant to acquire firms when they can’t predict cash flows due to a potential economic slowdown. “The threat of a significant recession in Europe has caused large European buyout firms to halt transactions. To a lesser extent, the uncertainty has slowed deal activity in the US. Sellers are also less inclined to sell a company after a sudden drop in market valuations. The market cycle has clearly paused and we hope it does not turn into a significant retrenchment.”

On the plan sponsor side of the equation, Lynch noted, limited partners are especially sensitive to cash flows — with fewer distributions, they are reluctant to make new commitments.

Click here to watch an aiCIO video with Cliffwater’s Lynch speaking on the evolving relationship between institutional investors and large private equity firms as investors seek added expertise with more complex investments.