Last updated: 15:57 / Monday, 15 June 2015
Coller Capital’s Barometer

80% of LPs Have Participated in PE Fund Restructurings Since the Financial Crisis

80% of LPs Have Participated in PE Fund Restructurings Since the Financial Crisis
  • Commitments to new GPs’ debut PE funds are strong – and their returns have been good
  • Investors expect private equity’s share in balanced investment portfolios to increase
  • Around 40% of LPs plan to sell – and 50% to buy – assets in the secondaries market within two years
  • Investors see better prospects for Asia-Pacific private equity – except in China

Eighty percent of private equity investors have been approached with fund restructuring proposals since the onset of the financial crisis, according to Coller Capital’s latest Global Equity Private Barometer. One fifth of LPs having received more than five such proposals. Approximately the same proportion of LPs have actually participated in fund restructurings over the same period.

Three quarter of North American LPs, and almost half (45%) of European LPs, have committed to debut funds from new GPs since the financial crisis. This trend has been encouraged by strong results: 91% of LPs say these debut funds have equalled or outperformed the rest of their private equity portfolios.

Private equity has continued to deliver strong returns for LPs, with four fifths of all private equity portfolios having delivered annual net returns of over 11% across their lifetimes. Nearly half of LPs have achieved net annual returns from North American buyouts of greater than 16%.

“Creative destruction is the name of the game in private equity today,” said Jeremy Coller, CIO of Coller Capital. “Investors are accelerating the natural pace of change in private equity through hyperactive buying and selling in the secondaries market, a demonstrable willingness to support newly-formed GP franchises, and decisions to exit or stay invested in restructured funds.”

Areas of investor focus

Limited Partners have a more positive view of private equity in the Asia-Pacific region than they did three years ago. They see an improved risk/reward profile in India, Taiwan, Japan, Korea and Australia; and fewer of them now harbour doubts about Indonesia’s and Malaysia’s private equity prospects. However, investors are less positive about the risk-reward profile for China than they were three years ago – one third of LPs believe it has deteriorated in the intervening period.

Almost half of North American LPs intend to commit to oil and gas-focused private equity funds in the next three years, following the recent fall in in oil prices.

Co-investments are viewed as an established part of the private equity landscape – most LPs think co-investment opportunities will stay plentiful, despite the growing size of private equity funds.

Investors are split over the attractiveness of ‘longer life’ funds (i.e. private equity funds with lives intended to be significantly longer than ten years). Around half of them see longer life funds as a potentially valuable option for investors, whereas the other half think private equity’s model is not suited to funds with much longer lives.

Fundraising environment

Both the medium-term and short-term prospects for private equity fundraising look healthy. Over half of LPs believe private equity’s share in balanced investment portfolios will increase over the next 3-5 years. And for the shorter term, half of European investors and one third of North American investors have commitments below their target allocations to the asset class.

Investor demand for ‘in favour’ GPs is very strong. Two out of three LPs say they have failed to receive their full requested commitment to new funds in the last 12 months, with two in five LPs reporting that this has happened to them a few times in the last year.

‘Early bird’ discounts remain a common feature of the fundraising market. Over four fifths of LPs have been offered ‘early birds’ in the last two years – and two thirds of LPs have taken advantage of them.

Investor views of private equity fees are interestingly divided by geography. Over half of LPs in North America and the Asia-Pacific say that current fee levels are acceptable as long as fees are transparent and fund performance is strong. However, only 30% of European LPs take this view – with most saying fees are too high even if there is transparency and returns are good. Fewer than half of LP (45%) are under significant pressure to reduce fees from senior levels within their organisations.

Credit markets

LP appetite for private debt remains high,with 53% of LPs either having recently committed to private debt funds or expecting to do so soon.

Interestingly, over half (56%) of private equity investors believe credit markets are now in danger of being over-regulated (although one fifth of LPs believe more still needs to be done by regulators). However, only one in five LPs believe the SEC’s recent guidelines limiting debt multiples in buyouts will adversely affect private equity’s risk/return profile in the medium to long-term.