Tue, May 26, 2020
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

LPs' portfolios are not ready for economic downturn

Monday, December 02, 2019
Opalesque Industry Update - The large majority (70-80%) of North American and Asia-Pacific LPs believe their private equity portfolios need modifying to prepare them for the next economic downturn, according to Coller Capital's Global Private Equity Barometer. European investors are more sanguine, with only 45% believing their portfolios need modification.

Despite this difference, nine out of ten LPs acknowledge the significant risks to their medium-term PE returns posed by today's macro environment and high asset prices. When the cycle does turn, almost all LPs expect to see a significant divergence in performance between GPs and between funds.

"We have experienced one of the longest stock market expansions in history," said Jeremy Coller, chief investment officer of Coller Capital, "but investors know that winter is coming. They are telling us that differences in the quality of managers' strategies and teams will again lead to a significant divergence of returns between GPs - just as it did in the GFC."

Unsurprisingly, investors also expect a divergence between GPs in fund terms and conditions over the next five years. And they generally expect to see the pendulum swinging in investors' favour. Three in five LPs expect an overall reduction in management fees, and one in five expect an overall reduction in carried interest rates.

Private equity and climate change

There are marked differences in LPs' responses to climate change dependent on their home geography. Almost three in five investors in Europe and Asia-Pacific plan to modify their portfolios to combat climate change in the next five years - but less than a third of North American investors plan a similar change. Limited Partners who do expect change to their investment strategies are broadly planning to replace oil & gas exposure with investment in renewable energy and climate-friendly products and services.

Private equity's reputation and 'licence to operate'

Many investors - and a significant majority of North American LPs especially - say that criticism of private equity by politicians and the media has recently grown louder. Moreover, three-quarters of investors in all regions of the world say it is incumbent on national and regional VCAs (industry associations for PE and VC) to do more to explain the industry and defend its 'licence to operate'.

Asked whether 'explaining the industry' implies that GPs should release more information about their portfolio companies, LPs are less sure. They are fairly evenly split as to whether the industry should release information on their portfolio company decisions to a wider group of stakeholders, or whether the industry's current levels of confidentiality are necessary for GPs to be able to effect rapid change.

Retail money in private equity

Around half of LPs believe that private equity will see an influx of 'retail' money from private individuals, (e.g. 401K or equivalent), in the next few years - however, investors are far from convinced that this would be a good thing. Three-quarters of Limited Partners think private equity investing is not suitable for private investors.

On the other hand, speculation that broad-based asset managers will enter the industry and disrupt private equity's business model fails to convince - three-quarters of LPs say this is unlikely in the next five years.

Emerging private equity markets

Asia offers by far the most attractive investment opportunities for emerging market private equity over the next three years, according to investors. Two-thirds or more of LPs see attractive opportunities in South East Asia, China/Hong Kong/Taiwan, and India - compared with approximately one-third of investors who see good opportunities in Central & Eastern Europe and Latin America.

Judgements like these are clearly important, because two in five LPs report that they have been disappointed by the performance of their emerging market private equity portfolios over time - a picture that remains almost unchanged from the Barometer of Winter 2015-16.

Private debt Limited Partner commitments to private debt funds appear to be plateauing. Equal proportions of LPs plan to accelerate and to slow their pace of commitments to private debt funds in the next two years. (In the Barometer of Winter 2015-16, around three times as many LPs planned to accelerate commitments as to slow them.)

Certainly, LPs see significant challenges ahead for private debt. Around three-quarters of investors foresee a risk both of increased default rates and of lower recovery rates as a result of more cov-lite structures. More generally, they worry that the increasing number of debt providers will lead to lower returns across the board. In such an environment, only one in six LPs say they are likely to invest in a debut private debt funds from a new manager.

Private equity commitments and returns

Investors are more frequently having to settle for smaller commitments to their chosen private equity funds than they did in the past. Over half of LPs have had their requested commitments 'scaled back' on multiple occasions in the past 12 months (compared with 42% of LPs in 2015). The areas where this is happening most often are venture capital and mid-market buyout funds, investors say.

Investor demand for venture fund commitments in particular - especially in North America - is not surprising. For the first time in the Barometer's history, investors are expecting higher returns from North American venture in the next few years than from North American buyouts.

Co-investments

Co-investing is continuing to grow in popularity. Almost 70% of private equity investors now co-invest alongside GPs, and some 44% of LPs actively pursue co-investment opportunities. (Indeed, among the largest LPs over one-third actively give preference to managers likely to offer them co-investments.)

The commonest reason LPs give for not doing more co-investments is a lack of internal resources to meet GPs' investment deadlines.

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Tiger Global tops the list US-based venture capital market[more]

    Laxman Pai, Opalesque Asia: Tiger Global Management holds on to its position as market-leader in US-based venture capital, said a study. According to Preqin, the closure of tech-focused Tiger Global Private Investment Partners XII in January means the New York-based firm has raised more than

  2. Tech: Fintech startup Brex closes $150m in pure venture funding amid recession[more]

    From Business Insider: Brex, the 3-year-old fintech unicorn, raised an additional $150 million in equity funding from existing investors and Lone Pine Capital, the company announced Tuesday. The cash infusion raised the startup's valuation to "around the $3 billion mark," cofounder and co-CEO Henriq

  3. PE/VC: Venture debt set to take prominent role, Building out Goldman Sachs's private-equity business[more]

    Venture debt set to take prominent role From PE News: Venture debt financing could be having its moment as the equity market becomes less friendly to start-ups. About $10bn worth of venture debt deals were made this year as of 21 April, a pace set to eclipse the roughly $25bn in such de

  4. Study: Emerging market bond issuers take hit as global recession deepens, The coronavirus pandemic could cost the global economy a nightmarish $82tn over 5 years, a Cambridge study warns[more]

    Emerging market bond issuers take hit as global recession deepens Increasing credit stress evident amongst many high-yield EM non-financial corporates as coronavirus disruption takes its toll, says Moody's. 74 out of 106 rated EM sovereigns have a stable outlook as of 30 April 2020 (compa

  5. Investing: Singer bets on Europe, emerging markets, Britain's unhealthy appetite for financial risk in essential services, How Stan Druckenmiller shook up his portfolio[more]

    Singer bets on Europe, emerging markets From Investment Magazine: William Blair's Brian Singer is looking to invest in Europe and the emerging markets as the recovery from the global economic shutdown to contain the pandemic will likely take longer than what the market has priced in.