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Private equity still in growth mode despite dip in UK sentiment

Some 90 per cent of LPs surveyed by Rede Partners for the 2H2018 Rede Liquidity Index (RLI) expect to increase or maintain their existing allocations to primary funds over the next year, leading to an overall RLI score of 63, down slightly from 65 in H1 2018.

Expectations for the private equity market remain strong, according to the RLI, an industry benchmark assessing investor sentiment towards the asset class. Despite this, there has been a modest cooling in investor expectations for growth in private equity commitments over the last six months.
 
The findings are based on the views of the RLI Panel, a group of the 144 of the world’s largest institutional investors, representing in aggregate over EUR5 trillion in assets under management and approximately EUR800 billion in capital allocated to private equity.
 
Similar to the Purchasing Managers Index (PMI), a baseline score of 50 represents no change, whilst a score above 50 indicates an expectation to increase private equity commitment over the next 12 months. A score beneath indicates an expectation to deploy less.
  
The decline in the overall RLI figure is driven almost entirely by an overall reduction of market sentiment in Europe (61), as the UK suffered a sharp downswing, with the local RLI score down 18 points from 73 in 1H2018 to 55 in 2H2018.
 
As allocation expectations have come down for UK LPs, so have their expectations of distributions from the asset class (42). This drop in sentiment has been felt across the European continent, as the region as a whole produced a score of 52 for distribution expectations, down 11 points on 1H2018. Despite this, investment activity amongst UK panellists remains resilient. At 55, the overall RLI score for the UK continues to signify overall expectations for market growth.
 
Adam Turtle, Partner and Co-founder at Rede Partners, says: “While the UK is currently gripped by Brexit uncertainty, which seems to be having an impact on UK investors, the RLI demonstrates private equity’s reputation as an increasingly attractive asset class for institutional investors.”
 
“As economic uncertainty rumbles on, many investors continue to be encouraged by private equity’s resilience and ability to ride out short term volatility. It’s unsurprising to see that European institutional investors are reasserting their vote of confidence, planning on upping commitments to the asset class over the next 12 months.”
 
“The private equity industry has become used to record capital inflows from investors over recent years. Although we are still in a period of growth, if allocations begin to slow down it will be essential for private equity managers to prove they are able to add real value and deliver something unique that differentiates them from the herd if they are to remain competitive in months to come.”
  
After 2017 was dominated by existing manager re-ups, much of the anticipated growth in private equity deployment is now likely to be driven by institutional investors exploring new relationships, replacing existing investee platforms with new managers. The overall RLI score for deployment to existing relationships has fallen three points to 58 for 2H2018, while the figure for new relationships has increased by 1 to 66.
 
Experiencing the largest swing in sentiment towards new and existing relationships were North American LPs. Investors in the region gave an RLI score of 55 for existing relationships, down 7 since 1H2018, while appetite for new relationships ticked up 4 points to 66.
 
Scott Church, Partner and Co-founder at Rede Partners said: “North American LPs are preparing to branch out and explore new relationships over the coming year, which is a very positive sign of confidence in the market alongside bullish sentiment towards both allocations and distribution expectations from investors in the region.”
  
Co-investments remain a key area of focus for LPs over the next 12 months, as 93 per cent of RLI respondents plan on increasing investment or keeping allocations to the strategy the same. Both Europe and North America remain bullish about co-investments, scoring 70 and 68 respectively.
 
While most types of investors remain bullish, the score registered by the insurance sector fell by 13 points to 56, representing the most bearish investor category when it comes to co-investments. This is compared to high levels of confidence from fund of funds, which scored an RLI score of 81.
  
With a score of 44, the RLI is relatively unchanged compared with the last two editions of the Index. This follows a record year in 2017 with USD38 billion raised for secondaries funds, up 33 per cent from 2016 which was also a record year at USD29 billion raised.   
 
However, while the overall RLI score for secondaries remains under 50, investors are slightly more bullish towards the asset class than they were at the beginning of 2018.

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