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LP sentiment to private markets remains strong, says Coller

The vast majority of limited partners are expecting to either increase or maintain their allocations to private markets investments over the next year, according to Coller Capital’s semi-annual Global Private Capital Barometer.

The 40th edition of the barometer, which captured the views of 110 private capital investors from around the world who oversee a combined $2.1tn in assets, revealed that around one in three (31%) expect to increase their target allocation to alternative assets in the next 12 months, while three in five (59%) expect allocations to remain the same.

Investors are most likely to increase their target allocation to private credit (45%), with around one third expecting to increase their allocations to infrastructure (33%) and private equity (31%). In a signal of investors’ desire for further diversification and liquidity, 38% of those surveyed say that they expect to increase their allocation to private markets secondaries.

The expected increase in allocation to alternative assets reflects investor optimism about distribution levels, notably in private equity. Some 86% of investors say that they expect to receive an increase in distributions from private equity managers in 2024 compared with 2023. This rises to 95% and 91% for investors in Asia-Pacific and North America respectively, compared to 77% for those in Europe.

According to the barometer, investors have benefited from the private equity asset class as a whole in recent years, with 62% of saying that their PE portfolio has generated annual net returns of 11–15% since they began investing. Almost a third (29%) say that their private equity portfolios have delivered annual net returns of over 16%.

In a press statement, Jeremy Coller, Chief Investment Officer and Managing Partner of Coller Capital, said: “These findings are a huge vote of confidence for alternative assets. LPs stand ready to not just maintain their allocations but to actively increase them as they seek attractive, long-term risk adjusted returns. Nowhere is that clearer than in private market secondaries, where LPs have seen the diversification and liquidity on offer.”

Investors have mixed views on the increased use of NAV finance in the private equity industry, but appear to recognise that it is here to stay. While 57% of investors say that they are not comfortable with it, 48% believe general partners are likely to use NAV financing in the next 12-18 months.

There has been an industry trend of consolidation since 2021, and investors expect this to continue. Some 64% of the investors surveyed believe that at least one of the private equity managers they are currently invested with will merge with or be acquired by another manager during the next two years. In Europe, almost three-quarters (73%) of investors expect to see this further consolidation, as compared to 59% in North America and 55% in Asia-Pacific.

According to the barometer, 93% of investors plan to maintain or increase their target allocation to private credit in the next twelve months, while 95% plan to do the same for infrastructure.

In private credit, the majority (70%) see senior direct lending as a more attractive investment opportunity when compared to other forms of credit investment such as mezzanine lending (58%) and syndicated loans (36%). When investing in private infrastructure, 31% of investors say they favour equity-based returns, as compared to 19% who favour yield-based returns. 50% say that their focus is evenly balanced between the two.

The barometer also examined LP perceptions of star dealmakers and their relative importance in generating GP performance. Almost four fifths (78%) said that repeatable, sustainable processes and firm-wide networks mark out the best-performing investment GPs, while only one in five (22%) said that star dealmakers are the key feature of the best performing managers.

Almost half (48%) of investors surveyed have funds they regard as ‘zombie funds’ (where GPs are managing out existing portfolios due to an inability to raise new funds) within their private equity portfolio. Of the 52% that don’t currently have exposure to zombie funds, more than half (54%) think zombie funds will become a feature in their portfolio later in the cycle.

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