LPs to stick with private equity despite bleak outlook

Limited partners are content with “significant allocations” to private equity, but believe that one-quarter of private equity managers will disappear in the market downturn and one in 10 of their LP peers will default, according to new recent surveys on LP attitudes. 

“Scarce capital, slower returns and political uncertainty are the immediate future for our industry. Living with these conditions will require all our celebrated spirit of partnership,” Jeremy Coller, chief investment officer of secondary firm Coller Capital, said in a statement. Coller published its findings in its Global Private Equity Barometer. 

“LPs will need to be both patient and realistic. GPs will need to adapt quickly to investors’ changing requirements,” he said.

Institutions in the US that invest in private equity are committed to “significant allocations” to the asset class while decreasing their dependence on US equities, according to a separate survey from financial consultant Greenwich Associates.

According to the survey, more than 75 percent of the 152 corporate and public pensions, endowments and foundations that responded to the survey held steady their allocations to private equity and hedge funds during the past 12 months. About 20 percent of respondents increased their allocations to alternatives, while 4 percent reduced their allocation to private equity.

Recent examples of this include the $184 billion California Public Employees’ Retirement System, which approved an increase in its allocation to private equity from 10 percent to 14 percent.

Despite sticking with private equity, about 52 percent of the 120 private equity investors included in Coller’s survey say they resource constraints will reduce their ability to make or manage private equity investments.

To make up for the scant resources, about one in 10 investors are scaling back private equity investments or reducing the size of their private equity teams, while almost a quarter of respondents are planning to expand their private equity teams, the Coller survey said.

Meanwhile, 70 percent of respondents reduced their allocation to US equities in the past 12 months, the Greenwich survey said.

Also, 23 percent of the institutions in the survey have made investments in “opportunistic funds” including secondary private equity. “Endowments and foundations have led the way, with 45 percent of these institutions investing in opportunistic funds, followed by public pension funds at roughly one-third”, according to the Greenwich survey.

Private equity investors expect one-quarter of private equity managers to fail as a result of the financial meltdown, according to Coller Capital.

“Investors expect a quarter of today’s GPs to be unable to raise a new fund over the next seven years – in other words, to go out of business,” the survey said.

About one in 10 private equity investors will default on capital calls, according to the survey, which included 120 private equity investors from around the world. LPs also expect to see the “balance of power” between GPs and LPs shift to the side of the investors, the survey said.

“Around four-fifths of LPs expect the terms and conditions of new buyout funds to become more favourable to them,” the survey said.

Also, half of the respondents in Coller’s survey believe tax and other regulatory changes will damage private equity.