Private equity firepower is set to reach pre-crisis levels if a recent survey published by secondaries private equity major Coller Capital is anything to go by. Over a third or 37 per cent of limited partners or LPs as they are called (investors in PE funds) are planning to increase their target allocation to private equity over the next 12 months, and many of the world’s largest investors are planning to grow the size of their private equity teams, according to Coller Capital’s 19th edition of the Global Private Equity Barometer, a semi-annual global private equity survey.
About half of sovereign wealth funds plan to grow their teams, as do nearly half of insurers and asset managers and a quarter of public pension plans, suggested the survey which captured the views of 113 investors.
Over half (56 per cent) of LPs think the rate of distributions from private equity funds will increase over 12-18 months while 42 per cent of investors expect their GPs’ investment pace to increase.
If this was not enough, about 86 per cent of polled LPs anticipate net returns of more than 11 per cent over the three-five years – and a quarter of LPs expect net returns of more than 16 per cent. This bout in optimism towards private equity from return-conscious LPs is best explained by Jeremy Coller, CIO of Coller Capital. “It’s simple. Returns! In a low-return world, 86 per cent of LPs are forecasting annual net returns of more than 11 per cent from their private equity portfolios, and a quarter are expecting net returns of 16 per cent plus. Where else can you get that level of net return with such consistency?”
That LPs have renewed confidence in the private equity asset class is reflected well with a majority (62 per cent) of investors unanimously agreeing that hurdle rates (the minimum rate of return on an investment required by an investor), should remain at around their current level for the next 5-10 years.
Global vs emerging
Such enthusiasm for private equity at a global level might not necessarily translate into good news for Asia in general and Indian private equity in particular. "The market will benefit in general with the increase in appetite for private equity globally. But I don't think Asia will be the best beneficiary," said Hiro Mizuno, partner and head of Asia, Coller Capital.
LPs believe small and mid-market buyout transactions in Europe and North America will offer the best PE opportunities in two-three years–30-40 per cent of LPs plan to increase their exposure to this kind of PE. Talking specifically about India, Mizuno said that the disappointment with Indian private equity refuses to wane.
"It’s almost a universal feeling now that Indian private equity has failed to live up to the investors’ expectations. The industry needs to work hard to regain the confidence of investors. One of the biggest questions on the minds of international institutional investors is lack of domestic investors investing into Indian private equities. The Indian government needs to think about it. When international institutional investors fly to India, they want to see domestic LPs as well, not only GPs and service providers," said Mizuno.
Significantly, a quarter of LP also plan to begin investing, or to expand investment, in Africa over the next two-three years, suggested the survey.
Although a majority (58 per cent) of investors polled believe the stimulus administered to Japan’s economy so far by ‘Abenomics’ will create more opportunities for private equity in Japan; most believe the effect will be slight, as things stand.
On venture, innovation
Although investors are seeking to reduce their exposure to venture capital, they do not believe this will be consequence-free. Over half of private equity investors on both sides of the Atlantic think the weakness of European venture capital is a significant problem, which will affect the growth of the European economy.
They are, however, more sceptical about another possible source of innovation: the funding of futuristic tech-based ventures by billionaires. 60-70 per cent of private equity investors dismiss initiatives such as asteroid mining and the Los Angeles-San Francisco Hyperloop as ‘rich men’s vanity projects’.
(Edited by Joby Puthuparampil Johnson)