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Editor’s Letter: LPs start off 2019 with big plans for PE

We thought we’d start the year off right: talking about limited partners and how they’re viewing private equity.

From the looks of things, LPs aren’t pulling back from the asset class even a little bit. We ran through some of the largest public systems in the country to find out what they’re up to. Most are either maintaining their PE pacing or ramping it up. Check out our coverage package in this issue. 

This jibes with Coller Capital’s summer 2018 LP survey, which found that a majority of the 112 respondents planned to continue their pace of commitments to the asset class.

This is setting up 2019 to be another strong year for PE fundraising, with LPs looking for everything from more co-investment opportunities to sector-specific funds.

Coller’s more recent LP survey for winter 2018-2019 showed that about 19 percent of the 110 LP respondents planned to increase focus on sector-specific funds, including recruiting additional staffers for their teams or by hiring external advisers.

Around 88 percent of LP respondents saw good opportunities in the next three years in healthcare/pharmaceuticals, 82 percent in business services and 76 percent in information technology. Only 33 percent of respondents thought consumer provided good opportunity in that time frame, the survey found.

Even with pacing targets in place, some systems have a tough time hitting their goals for various reasons. Most systems say they are ultra-cautious in their selection of GPs (naturally, considering they are pledging millions to 10-plus year relationships), and won’t make a move if they totally convinced.

There’s also the problem of accessing preferred GPs that have overwhelming demand for their products. Many LPs chase the same opportunities that have a limited supply of space, even as GPs increase fund sizes.

This was the case for sovereign fund New Mexico State Investment Council, which committed less than half its pacing target for 2018. “We found ourselves in that situation because the best GPs do have their pick of LPs, the fund’s director of private equity, David Lee, told my colleague Preeti Singh.

The system going forward believes it’ll get its preferred allocations as some of its core managers, as well as others in which it has interest, are coming back to market this year, Lee said.

“We are a sovereign-wealth fund, we don’t have pension liabilities, we don’t have an underfunded status situation, so we feel like we can use this to convince very popular GPs to partner with us,” he said.

It’s a tough problem to have. Deep pockets and a desire to find top managers, but not enough supply to meet your demand. It’s a dynamic that’s going to keep the market busy through 2019.