The proportion of Limited Partners that make ‘direct’ investments (investments into private companies without the involvement of a private equity fund) has peaked, according to Coller Capital’s latest Global Private Equity Barometer.
Between 2006 and 2012, the share of LPs making direct investments almost doubled, but it has not changed materially since then, remaining at about a third of LPs. Co-investing, by contrast, has been increasingly popular, with the number of LP co-investors doubling over the last decade.
Another structural limit has become apparent in LP approaches to Chinese private equity. The proportion of investors committing to China-specific funds (as opposed to regional funds or funds-of-funds with exposure to China) now stands at around half of LPs. The Barometer shows that this proportion is unlikely to grow.
These limits are not because private equity has stopped growing as an asset class. On balance, large and small investors alike are planning either to maintain or increase the number of managers they invest with – and also to grow the volume of capital they commit to each manager’s fund. (Half of investors plan to increase their average size of commitment, compared with one in ten planning a reduced commitment size.)
“This Barometer paints an interesting picture of an industry whose size is continuing to grow, but whose shape is starting to become fixed,” says Jeremy Coller, CIO of Coller Capital. “We’re seeing a parting of the ways in the investor community. Limited Partners who have adopted specialised approaches to private equity – investing directly into private companies, for example – will probably increase the proportion of capital they put to work in those areas. Investors who have not already chosen such routes will not necessarily do so in the future.”
The Barometer reveals several interesting dynamics in European private equity.
Many European investors see buyouts in France and German-speaking countries as being more attractive now than in the last few years (43 per cent and 34 per cent of European LPs respectively) – whereas the UK buyout market is seen as having become less attractive by 44 per cent of European LPs.
LPs from all regions of the world are positive about the prospects for venture capital in Europe over the next five years. Fully three quarters of European and Asia-Pacific LPs see the European VC sector as attractive or very attractive, as do over half of North American investors.
Twice as many European as North American investors are focused on increasing their exposure to alternative assets: 59 per cent of European LPs plan to increase their target allocations to alternative assets in the next year, compared with 31 per cent of North American investors. (Hedge funds are the only area of alternative assets where both groups of investors are on balance planning to lower their target allocations.)
LPs overwhelmingly reject the use of quotas as a way to encourage more female participation in private equity. While three quarters of investors believe GPs should adopt aspirational targets both for the number of women they hire and the number of women on their investment committees, only a very small proportion would support quotas to achieve these things (one in twenty, and one in ten, LPs respectively).
Investors believe GPs’ recruitment and promotion practices partially explain why there are more senior women at LPs than at GPs – but they think the biggest reason (cited by over half of investors) is a better work-life balance at LP institutions.
Nonetheless, investors acknowledge a clear direction of travel for the industry – with almost three quarters of LPs expecting the ratio of women to men at GP firms to improve over the next three years, and over half of LPs expecting to see a higher ratio of women to men at LP institutions.
Investing in marijuana remains a contentious issue for LPs. Four out of five private equity investors would be uncomfortable with their GPs investing in a business focused on the recreational use of marijuana, but a small majority (57 per cent) would support investments in businesses focused on medicinal uses of the drug. (Perhaps unsurprisingly, North American LPs were most tolerant of businesses focused on recreational uses – with 30 per cent expressing their support.)
Four out of five LPs now have some kind of private equity exposure to China – through global funds, pan-Asian funds, or China-specific funds. Western LPs are also gradually gaining confidence in Chinese GPs: over two fifths of North American LPs, and one fifth of European LPs, would be more likely to select a domestic GP for their Chinese exposure now than they were three years ago.
Investors continue to expect attractive returns from their private equity portfolios in the medium term. According to the Barometer, four-fifths of LPs expect net annual returns of more than 11 per cent across their private equity portfolios over the next 3 to 5 years.
LPs are slightly more cautious about the longer term: one third expect private equity returns to stay at more or less their current level; three fifths think they will decrease over the long term with as the market matures – while an optimistic 7 per cent of LPs believe returns will increase as the world moves into a new economic or market cycle.