LPs still expect strength from PE, but less than before

While limited partners expect strong returns for private equity heading into 2017, a greater portion see returns at the low end of the scale than at any time in the past five years, the latest Global Private Equity Barometer from Coller Capital shows.

The surprise Brexit vote remains in the mix. The pound rallied recently as fears eased that Britain would no longer have access to the single market of the European Union — a so-called hard Brexit. The jitters around that prospect have extended into private markets as LPs look into 2017.

“Investors do believe that a hard Brexit would impact their general European private equity returns,” said Eric Foran, principal at Coller Capital, said by phone.

Of the LPs Coller Capital surveyed, 57 percent forecast PE-portfolio returns of 11 to 15 percent over the next three to five years. Twenty-one percent are even more bullish, expecting annual returns of 16 percent or higher in that period.

Despite this strong outlook, 22 percent of LPs — the most in five years — say annual PE returns will be less than 11 percent from 2017 to 2022. By comparison, in 2014, only 7 percent of LPs forecast returns of less than 11 percent.

LPs appear much more wary in the face of the surprise elections in the U.S., the U.K. as well as other big votes awaiting in France, Germany and Italy.

Other macroeconomic factors in the U.S. and Europe include an expected interest rate rise by the Federal Reserve, tax cuts and regulatory changes. Talk of flat growth and a coming recession persists. High deal prices also loom as a factor that could hurt PE returns.

Overall, private equity continues to outperform within the portfolios of institutions, insurers, foundations, family offices and pension funds that also invest in public equities and bonds.

Within PE more than half the world’s LPs said they expected to grow their target allocations to infrastructure in the next 12 months.

Forty percent of LPs plan to lift their target allocations to real estate and PE. In emerging markets, India and Southeast Asia earned the highest marks for investment in the next three years. Views on Brazil and Argentina remain less bullish, with one quarter of LPs citing those two countries as less attractive for PE over the next three years.

Coller Capital compiles the barometer twice a year. The most recent results, released Dec. 5,  reflected a survey of 110 PE investors worldwide during late 2016.

Chart of private equity return expectations from LPs courtesy of Coller Capital