As the alternative investing space moves gradually towards a co-investing model, Limited Partners (LPs) sense a lack of skills, experience and processes required for successful co-investing, according to Coller Capital’s latest Global Private Equity Barometer.
The study shows that the number of LPs with special or managed accounts attached to private equity funds have increased to 35 per cent today from 13 per cent in 2012. Maximum investors view this proportion to have negative implications as it potentially creates a conflict of interest.
The main reasons for co-investment lagging behind is difficulty in meeting General Partner (GP) deadlines or the inability of LPs in recruiting the right staff with the necessary skills. At least 55 per cent investors feel that LPs have insufficient understanding of the factors that drive the performance of co-investments.
With the value of deals increasing, small investors are increasingly being disadvantaged by the volume of money being committed by their large peers to individual funds. Small LPs have less negotiating power with the GPs.
Direct investing and opening overseas offices are some factors that will help investors in achieving higher returns from PE than LPs with more constraints. Some global LPs like Canada Pension Plan Investment Board, Partners Group, International Finance Corporation, Siguler Guff Capital and CDC Group Plc have set up their offices in India.
In India, LPs have asserted their rights and taken over troubled funds when dissatisfied with the performance of the GP. In October, VCCircle reported that Avigo Capital’s investors had taken over control of the PE firm’s portfolio.
The Coller Capital study states that investors will remain committed to expanding their presence in emerging markets. “Over the next three to four years, the proportion of LPs with more than a tenth of their private equity exposure in emerging markets will rise from 27 per cent to 44 per cent,” the report said.
Having a strong investment track record is still the top priority for LPs to back first-time fund managers. Almost 94 per cent of the LPs surveyed have invested in individuals with an outstanding investment track record. With this, LPs also forecast net annual returns of more than 11 per cent from their private equity portfolios over the next three to five years.
Alternative assets have managed to remain attractive for investors with 41 per cent of LPs planning to increase their target allocation to these asset classes over the next 12 months. Almost half of LPs plan to boost the share of their assets in infrastructure, with over one-third planning an increase in their allocation to private equity.