The Proportion of LPs Competing with GPs for Assets has Peaked.
- The UK buyouts market has become less attractive, say 44% of European PE investors
- LPs reject quotas to boost female representation in the private equity industry
- Recreational marijuana businesses are unsuitable for private equity, a majority of LPs think
The proportion of Limited Partners that make ‘direct’ investments (investments into private companies without the involvement of a private equity fund) has peaked, according to Coller Capital’s latest Global Private Equity Barometer.
Between 2006 and 2012, the share of LPs making direct investments almost doubled, but it has not changed materially since then, remaining at about a third of LPs. Co-investing, by contrast, has been increasingly popular, with the number of LP co-investors doubling over the last decade.
Another structural limit has become apparent in LP approaches to Chinese private equity. The proportion of investors committing to China-specific funds (as opposed to regional funds or funds-of-funds with exposure to China) now stands at around half of LPs. The Barometer shows that this proportion is unlikely to grow.
These limits are not because private equity has stopped growing as an asset class. On balance, large and small investors alike are planning either to maintain or increase the number of managers they invest with – and also to grow the volume of capital they commit to each manager’s fund. (Half of investors plan to increase their average size of commitment, compared with one in ten planning a reduced commitment size.)
“This Barometer paints an interesting picture of an industry whose size is continuing to grow, but whose shape is starting to become fixed,” said Jeremy Coller, CIO of Coller Capital. “We’re seeing a parting of the ways in the investor community. Limited Partners who have adopted specialised approaches to private equity – investing directly into private companies, for example – will probably increase the proportion of capital they put to work in those areas. Investors who have not already chosen such routes will not necessarily do so in the future.”
Changes in Europe
The Barometer reveals several interesting dynamics in European private equity.
- Many European investors see buyouts in France and German-speaking countries as being more attractive now than in the last few years (43% and 34% of European LPs respectively) – whereas the UK buyout market is seen as having become less attractive by 44% of European LPs.
- LPs from all regions of the world are positive about the prospects for venture capital in Europe over the next five years. Fully three quarters of European and Asia-Pacific LPs see the European VC sector as attractive or very attractive, as do over half of North American investors.
- Twice as many European as North American investors are focused on increasing their exposure to alternative assets: 59% of European LPs plan to increase their target allocations to alternative assets in the next year, compared with 31% of North American investors. (Hedge funds are the only area of alternative assets where both groups of investors are on balance planning to lower their target allocations.)
Women in private equity
LPs overwhelmingly reject the use of quotas as a way to encourage more female participation in private equity. While three quarters of investors believe GPs should adopt aspirational targets both for the number of women they hire and the number of women on their investment committees, only a very small proportion would support quotas to achieve these things (one in twenty, and one in ten, LPs respectively).
Investors believe GPs’ recruitment and promotion practices partially explain why there are more senior women at LPs than at GPs – but they think the biggest reason (cited by over half of investors) is a better work-life balance at LP institutions.
Nonetheless, investors acknowledge a clear direction of travel for the industry – with almost three quarters of LPs expecting the ratio of women to men at GP firms to improve over the next three years, and over half of LPs expecting to see a higher ratio of women to men at LP institutions.
Marijuana as an opportunity for private equity
Investing in marijuana remains a contentious issue for LPs. Four out of five private equity investors would be uncomfortable with their GPs investing in a business focused on the recreational use of marijuana, but a small majority (57%) would support investments in businesses focused on medicinal uses of the drug. (Perhaps unsurprisingly, North American LPs were most tolerant of businesses focused on recreational uses – with 30% expressing their support.)
Chinese private equity
Four out of five LPs now have some kind of private equity exposure to China – through global funds, pan-Asian funds, or China-specific funds. Western LPs are also gradually gaining confidence in Chinese GPs: over two-fifths of North American LPs, and one fifth of European LPs, would be more likely to select a domestic GP for their Chinese exposure now than they were three years ago.
Private equity returns
Investors continue to expect attractive returns from their private equity portfolios in the medium term. According to the Barometer, four-fifths of LPs expect net annual returns of more than 11% across their private equity portfolios over the next 3-5 years.
LPs are slightly more cautious about the longer term: one third expect private equity returns to stay at more or less their current level; three fifths think they will decrease over the long term with as the market matures – while an optimistic 7% of LPs believe returns will increase as the world moves into a new economic or market cycle.
Additional Barometer findings
The Winter 2017-18 edition of the Barometer also captures investors’ views and opinions of:
- Specialist GPs vs multi-product platforms
- The likely future sources of GP dealflow
- The use of Artificial Intelligence in PE
- Debt financing in buyout markets
- PE vis-à-vis systemic risks to the financial system