About one quarter of private equity fund managers will fail as a result of the downturn, according to Coller Capital’s latest Global Private Equity Barometer. The latest barometer suggest that the industry is gearing for wide ranging changes over the next few years.
Private equity investors (LPs) expect to see: the disappearance of many existing private equity fund managers (GPs); defaults on commitments by about one in 10 investors; a significant shift in the balance of power between LPs and GPs; threats to returns from regulatory and tax changes; and a further deterioration in investment conditions in the near term.
Regulatory and tax changes will damage private equity
Adding to the above changes, the report suggests that the regulatory and tax changes will inflict more far-reaching damage on the asset class. Half of LPs think this is likely to happen in Europe, and more than half expect the same to happen in North America.
Balance Of Power Shifting To LP's
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The relationship between LPs and GPs will change strikingly over the next few years. First, the players themselves will be different: investors expect a quarter of today’s GPs (28% of venture capital firms and 23% of buyout firms) to be unable to raise a new fund over the next seven years – in other words, to go out of business. On the LP side, they think a tenth of all private equity investors will default on fund commitments in the next two years.
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The balance of power between LPs and GPs is also changing fast. Around four fifths of LPs expect the terms and conditions of new buyout funds to become more favourable to them, and a majority – two thirds of LPs – expect the same for new venture funds.
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Increased Transaprency Demanded From GP's
Investors also want improved transparency and risk management from fund managers. Scarce capital, slower returns and political uncertainty are expected to be the immediate future for our industry.
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Scarce Capital & Slower Returns
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The global downturn has reduced investors’ overall private equity returns. 37% of LPs now report overall net returns of 16% or more from the asset class, compared with a high of 45% of LPs in Summer 2007, said the report.
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GPs in Asia-Pacific will, overall, fare better in this respect than their counterparts in more developed private equity markets. The report suggested that the fewer investors (just 11%) are planning to reduce their number of GP relationships in the Asia-Pacific region than in other regions.
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Investors themselves expect to be harder pressed in days to come. Despite the fact that a third of LPs are planning to reduce their number of GP relationships, over half of them (52%) expect resource constraints to reduce their ability to make and manage private equity investments. Different institutions are reacting to this in different ways. Those scaling back their private equity investment or retrenching organisationally (about one in 10 investors) are planning to reduce the size of their private equity teams; however, a larger proportion of LPs (almost a quarter) plan to take on additional staff to help them cope.
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