Coller Capital: LPs Views on PE Brighten, But Hard Landings Are Expected

For the second straight summer, limited partners’ views on private equity as an asset class continued to brighten, according to a Coller Capital report released Monday. They’re looking to increase target allocation in greater numbers and LPs say debt markets are functioning well and that dividend recaps are a sign of strength.

Nearly one quarter of respondents, or 24%, think that from 21%-30% of the asset class will fail to raise another fund. Roughly one-fifth, or 19%, of LPs believe that more than 30% of PE firms will not raise another pool.

So two options are available for these firms and their employees: sell out or shut down. Consolidation seems to be a built-in expectation for the asset class, at least from LPs’ perspective.

“Generalists without strong track records will go away” as the industry consolidates, with bigger firms swallowing smaller ones, says Jonathan Gutstein, partner with Coller Capital. Most likely, middle market sponsors will be the PE firms getting bought, he said.

Further, it is possible asset managers will make deals in the space to roll up multiple firms—consolidation won’t necessarily be limited to deals between financial sponsors.

Still, Gutstein says, despite the dour outlook LPs expect, the news actually improved. “It came down a little bit,” he said, regarding the percentages of survey respondents who predicted firm failures.

He also noted recalibrations of LP concerns. Terms and conditions, reporting and transparency and conflicts of interest—all things most respondents to Coller’s winter 2009-2010 survey said are primary concerns and would deter them from a re-up—took a backseat to management concerns like GP staff turnover and succession issues. LPs, it seems, are looking ahead now, and trying to gauge who they will want to work with in the future. Clearly, they do not expect to be working with all of their current GPs.

Sector specialists, private equity firms that have built-in practices, and executives-in-residence working on platform development should fare better, Gutstein says. Altogether, IE Consulting, a division of Incisive Media, surveyed 110 limited partners for Coller Capital to produce the report.

“There is a general theme of optimism” in the report, Gutstein added.