When your existing LPs refuse to commit capital, you know you’re in for a rough ride. Coller Capital’s latest survey of LPs shows that more than three fourths of LPs will refuse re-ups in 2010 over terms and conditions. It’s not shocking but it means things have gotten worse in the last year, where just 57% said the same thing. Read more details on the survey below.
OVER THREE QUARTERS OF LPs WILL REFUSE RE-UPs IN 2010
BECAUSE OF POOR GP ALIGNMENT AND TRANSPARENCY
• Perceptions of private equity have been damaged within many LPs’ own organisations
• Two thirds of LPs have changed how they manage private equity since the credit crunch
• Large growth in capital calls expected in 2010 … and 2010 will be a good-to-great vintage year
Concerns about inadequate GP reporting, conflicts of interest, and fund terms and conditions will lead over three quarters of investors to refuse commitments to new funds from their current managers in 2010, according to Coller Capital’s latest Global Private Equity Barometer.
79% of LPs will refuse re-ups in 2010 because of fund terms and conditions (vs 57% in the Winter 2008-09 Barometer); 76% will do so because of inadequate GP transparency (vs 39% in 2008-09); and 76% will do so because of perceived conflicts of interest (vs 51% in 2008-09).
LPs’ medium-term return expectations have fallen sharply in the last year: the proportion of investors expecting annual net returns of 16%+ over the next 3-5 years has fallen to 29% (from 43% in last Winter’s Barometer). Many LPs report that the poor performance of private equity during the downturn has damaged perceptions of the asset class within their own organisations. In Europe and Asia in particular, half of investors say internal perceptions have been damaged; in North America 28% of investors say the same.
Two thirds of LPs have also changed the way they manage private equity as a result of the downturn: 60% of these LPs say they have changed their risk appetite and investment criteria; around half have deepened their due diligence prior to committing to a fund; and another half have demanded improved reporting from their GPs. 40% of LPs have also strengthened their in-house teams.
Commenting on the Barometer’s findings, Jeremy Coller, CIO of Coller Capital, said: “For many private equity investors it’s a case of ‘once bitten, twice shy’. The growth of private equity as an asset class is inevitable in the long-term, but we should understand that for many LPs, now, private equity is a harder sell internally, and for all LPs, GPs now have more to prove. We should remember, though, that in terms of total capital raised the private equity industry is barely 15 years old. When we look back in a few years, I think we’ll see today’s upheavals as a significant moment in the maturing of the industry.”
Outlook and opportunity
Over three quarters of investors expect a significant increase in capital calls during 2010 – especially North American LPs, 84% of whom expect to see a big uptick in GP drawdowns in the next 12 months. And investors expect this money to be put to good use – 85% of LPs think 2010 will be a good or great vintage.
Two thirds of investors also expect distributions to improve during 2010 – a big turnaround since the summer, when 74% expected distributions to slow. However, most investors (67%) think the improvement in the exit environment will be slight – only one quarter of LPs think there will be a significant improvement in the next two years.
LPs see buyout transactions of less than $1bn in North America and Europe as offering the best private equity investment opportunity, followed by growth capital deals in the Asia-Pacific region. Generally, the best source of good transactions is expected to be GPs buying businesses out of bankruptcy or Chapter 11, and corporations divesting divisions.
– more –
Daniel Dupont, Partner at Coller Capital, said: “It is totally justified that LPs will be more selective, that they will increase their due diligence before committing to a fund and pay more attention to their private equity allocations. However, a majority of them have not lost faith in private equity: 70% of them expect to maintain the same allocation levels in private equity during the course of the next 12 months; 20% of them expect an increase in allocation over the period, whilst only 10% expect it to decrease.”
LPs are far more positive about the near-term prospects for North American venture capital deals (52% of LPs see these as good), compared with the outlook for venture deals in Europe and Asia.
The Barometer shows how much investor views of the secondaries market have changed in the last couple of years. LPs today see secondaries as an important tool for changing the overall composition and liquidity profile of their portfolios – 92% of LPs now cite the need for liquidity as a reason for investors to sell in the secondaries market (compared with 27% in 2007), and 82% now identify the need to re-balance private equity portfolios (compared with just 39% in 2007).
Most investors (67%) do not expect to tighten restrictions on placement agents in the wake of recent scandals in the industry, suggesting they think they have adequate protections already in place. About 1 in 7 LPs expect to increase their controls on placement agents, even if no new regulation in that area is forthcoming.
– ENDS –
For further information on Coller Capital’s Global Private Equity Barometer, please contact any of the following:
Chris Tofalli +1 914 834 4334
Chris Tofalli PR, New York firstname.lastname@example.org
Notes to Editors
LPs (Limited Partners) are investors in private equity funds. GPs (General Partners) are private equity fund managers.
Coller Capital’s Global Private Equity Barometer is a unique snapshot of worldwide trends in private equity – a twice-yearly overview of the plans and opinions of institutional investors in private equity based in North America, Europe and the Asia-Pacific.
This latest Barometer captured the views of 108 private equity investors from around the world. The Barometer’s findings are globally representative of the LP population by: investor location; type of investing organisation; total assets under management; and length of experience of private equity investing.
About Coller Capital
Coller Capital, founded in 1990, is the leading global investor in private equity secondaries – the purchase of original investors’ stakes in private equity funds (venture capital, buyout and mezzanine) and the acquisition of portfolios of companies or stakes in companies, from institutions, corporates, government bodies and family offices. Our investment in any one transaction ranges from $1 million to more than $1 billion. Coller Capital’s latest fund, Coller International Partners V, has capital commitments of $4.8 billion from 200 of the world’s leading institutional investors.
Coller Capital’s name is synonymous with the development of the secondaries market. In 1994, the firm launched the first European secondaries fund, and in 1998, the first global secondaries fund. Coller Capital has also been responsible for many of the industry’s most notable transactions, including: the $1 billion purchase of NatWest’s private equity portfolio from the Royal Bank of Scotland; the first major purchase of a corporate venture portfolio – 27 technology companies from Lucent’s Bell Labs; and the acquisition of a $900 million portfolio from Abbey bank.
For more information about Coller Capital, visit the firm’s web site at: www.collercapital.com