Survey Says: LPs Are Confusing

Ah, the cognitive dissonance of limited partners…

A few months back, I moderated a Columbia University panel at which LPs said: (a) The best returns come from investments made during economic trouble; and (b) We’re not going to invest much until 2011. No, it wasn’t an argument in support of a double-dip recession. It was cowardice trumping intellect.

Today we have a new example, courtesy of the Private Equity Barometer, a bi-annual survey of limited partners conducted by Coller Capital (download full study here).

It finds that more than half of all limited partners have lifetime returns from private equity of 10% or less. At the same time, more LPs plan to increase their exposure to private equity (20%) than plan to decrease their exposure (13%).

Coller Capital boss Jeremy Coller provides his take:

“It’s natural to ask why investors are maintaining or strengthening their commitment to private equity after a big fall in their returns. The simple answer is that private equity investment is a demonstrably skill-based activity – for LPs and GPs alike – and the credit crunch and recession have been a useful, if painful, learning experience. Limited Partners, for their part, will have learned many invaluable lessons from the downturn, not just about which GPs have the requisite skills, but also how and where those skills can best be deployed.”

What I think Jeremy may be trying to say is that many of the LPs with poor lifetime returns are relatively new entrants to the market. And this does make a certain bit of sense, considering all the sovereign wealth funds and non-U.S. family offices that flooded into private equity beginning in 2006. Moreover, the 20% that’s increasing its allocation might be part of the 49% with better lifetime returns — while the majority of folks standing pat might be waiting/praying to see where their ROIs shake out.

But, again, the headline numbers are head-scratching. And, at the very least, they are likely to dissuade new institutional investors from entering the market.