Appetite for private equity funds will remain muted this year, although investors should be reasonably hungry for partnerships earmarked for mid-market buyout, growth equity and Asian private equity funds, according to a late 2010 survey of funds-of-funds managers and other investors.
The killjoy continues to be overhang—the piles of money pledged to buyout funds during the go-go years of 2005 to 2007 but not yet drawn down, or if drawn down not yet returned. As in the late 2009 survey, more than half of respondents said they are either at or over their target allocations. Among those that are, according to separate research by Buyouts: Washington State Investment Board, which as of the end of September had nudged above its 25 percent target allocation to private equity.
In addition, general partners shouldn’t expect those investors that do have money to commit to be spendthrifts. More than half (57 percent) of respondents to the survey said that they are looking to commit $150 million or less to funds this year. Again, that’s largely consistent with the results of the late 2009 survey.
The survey, which produced more than 180 responses, was conducted at the beginning of November by placement agency Probitas Partners. At just more than one in four (27 percent), managers of funds of funds represented the largest group of respondents. That was followed by public pension funds (14 percent), endowments and foundations (13 percent), and consultants and advisers (13 percent). More than three-quarters of respondents are based in North America or Europe.
In a smidgeon of good news for vintage 2011 hopefuls, 16 percent of respondents said they are either considering raising their target allocation, or seeking to, either because they are at target or have already breached it. On the other hand, 4 percent said they are looking to reduce exposure because they are over target, and an evidently discouraged 3 percent said they are “looking to reduce our target and exit the asset class.”
The survey offered little comfort to emerging managers and others looking to build or broaden their investor bases this year. The “major focus” this year of nearly two-thirds of respondents (62 percent) will be “evaluating re-ups with current GP relationships with a limited look at new relationships.” Fewer than one in four (24 percent) picked “pursuing relationships with new managers” as this year’s major focus.
So what private equity strategies will resonate most with investors this year? Nearly half of respondents to the survey, or 46 percent, said they would focus most of their attention on U.S. middle-market buyout funds of $500 million to $2.5 billion (respondents could pick up to five strategies). That was followed, in order of popularity, by growth capital funds (39 percent), U.S. small-market buyout funds of $500 million or less, country-focused European mid-market buyout funds (33 percent), and Asia country-focused funds (30 percent). By contrast, categories that seem to be losing some of their recent luster with investors include restructuring funds (19 percent) and secondary funds (13 percent), while U.S. venture capital remains chopped liver, at 17 percent.
Just 5 percent of respondents said they would be focusing most of their attention on mega-funds of $5 billion or more this year, although that no doubt reflects the fact that there are comparatively so few of them, even at the best of times.
Asked to name their favorite regions in Europe for commitments, nearly half (47 percent) of respondents picked the Nordic Region as most attractive (respondents could pick up to three). That was followed by Germany (37 percent) and the United Kingdom (36 percent). In Asia, China ranked as the most attractive region of all, at 55 percent of respondents, followed by India (32 percent) and Australia (20). Japan was a most attractive pick for just 7 percent of respondents.
According to the survey, buyout shops would do well to continue emphasizing their operational chops during road shows. Respondents were asked what they find to be the “most attractive” U.S. middle-market sector or strategy. The pick of nearly half of respondents: “Funds focused on operational improvements heavily staffed with professionals with operating backgrounds.”