LPs not changing their investment strategy because of Brexit, trade war: survey

An escalating trade war between the U.S. and China and the U.K.’s upcoming departure from the European Union aren’t enough to deter limited partners from pumping capital into private equity, according to a survey from global placement agency Eaton Partners.

Out of the 50 LPs surveyed, 48 percent said that uncertainty about Brexit has “no immediate impact” on their investment activity in the U.K. Around 27 percent said they would invest less in the region and 4 percent plan to allocate more to the U.K., the survey, which was published on Tuesday, showed.

An even larger percentage of investors said they’re not worried about escalating trade tensions with China on their Chinese investments. About 69 percent of respondents said the punitive tariffs set by each country don’t affect their investment strategy in the region. Eight percent of LPs plan to increase investments in China and 4 percent plan to decrease their investments.

Peter Martenson, a partner at Eaton, told Buyouts he’s “pleasantly surprised” that investors aren’t being impacted by the daily news cycle and its framing of the trade war and Brexit, which he labeled as more negative.

“Our polling shows that institutional investors are maintaining a business-as-usual posture even in the face of geopolitical headwinds and economic uncertainty,” Martenson said in the survey.

“They seem to be a bit more positive with their investment, and the tactical implementation of it,” he said during a phone call.

According to the survey, LPs view the broader economy more positively than Wall Street, with 50 percent of respondents reporting that despite slowing growth, the economy is doing well. A recession is at least a year away, according to 44 percent of those surveyed. Six percent of respondents believe the economy is noticeably deteriorating and that the U.S. will enter a recession in 2019.

Geopolitics weren’t the only thing on investors’ minds as they also shared their views on investment strategies not related to the public markets. Around 36 percent of LPs felt that litigation finance would bring the strongest uncorrelated returns to equity markets, followed by life settlements, which received 32 percent. Timberland/farmland and royalties asset classes received 22 percent and 10 percent, respectively, of support among LPs.

Investments performed strongly in the first half of 2019 but are not expected to perform as well in the second half of the year, according to 73 percent of survey respondents.

“I think people are being cautious and that’s coming through in the results,” Martenson said. “The first half was really good, whether it’s the GDP or the stock markets.”

The results are a good indicator of what to expect at the end of the year and in 2020, according to Martenson, who expects an end to the trade war, “which would be a positive push for the U.S. and the global economy.”