Private equity investors are worried about the damage regulatory and tax changes could cause in the next few years, according to Coller Capital’s latest Global Private Equity Barometer.
Private equity investors are worried about the damage regulatory and tax changes could cause in the next few years, according to Coller Capital’s latest Global Private Equity Barometer.
Coller Capital found that private equity investors expect to see the disappearance of many existing fund managers, defaults on commitments by about one in ten investors, a significant shift in the balance of power between investors and managers, and a further deterioration in investment conditions in the near term.
While some of this change might be viewed as an industry in renewal, many investors are worried that regulatory and tax changes will inflict more far-reaching damage on the asset class. Half of investors think this is likely to happen in Europe, and more than half expect the same to happen in North America.
Investors also believe the relationship between themselves and managers will change strikingly over the next few years. First, the players themselves will be different: investors expect a quarter of today’s managers (28 per cent of venture capital firms and 23 per cent of buyout firms) to be unable to raise a new fund over the next seven years – in other words, to go out of business. They also think a tenth of all private equity investors will default on fund commitments in the next two years.
The balance of power between investors and managers is also changing fast. Around four fifths of investors expect the terms and conditions of new buyout funds to become more favourable to them, and two thirds expect the same for new venture funds.
Investors also want improved transparency and risk management from fund managers. Over half of investors worldwide (and as many as three quarters in Asia-Pacific) think a significant number of managers need to improve. One in ten investors think most managers need to improve.
Jeremy Coller, chief investment officer of Coller Capital, says: ‘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. LPs will need to be both patient and realistic. GPs will need to adapt quickly to investors’ changing requirements. Above all, LPs and GPs will need to stand together in the face of any ill-considered policy initiatives. It would be all too easy to break private equity’s alignment-based model by regulating away its flexibility or taxing away its incentives.’
Investors themselves expect to be harder pressed in days to come. Despite the fact that a third are planning to reduce their number of fund manager relationships, over half of them (52 per cent) expect resource constraints to reduce their ability to make and manage private equity investments.
Economic conditions are likely to worsen in the near term, investors think. Three quarters expect distributions from their portfolios to deteriorate further over the coming year. This will be the direct result of a stagnant exit environment: only a quarter of investors expect any short-term improvement in exits.
Valuations, too, have further to fall – three quarters of investors believe valuations reported by managers at the end of 2009 will be significantly lower than last December’s audited valuations.
