Once bitten, twice shy: Caution reigns for private equity investors

Private Equity 06 Jan 2010

ouchLast summer, we reported on the changing face of private equity, as reflected in a nifty semi-annual publication from private equity firm Coller Capital.  The firm recently published its winter edition showing that much has changed in the world of private equity in a relatively short amount of time.

For starters, return expectations have taken a hit.  The proportion of survey respondents that expected 16%+ annual returns in the mid-term (3-5 years) has fallen by a quarter (see chart below from report).

coller1

Perhaps as a result of these expectations, investors have dialed down their enthusiasm for private equity.  Less than a fifth of investors said they planned to increase private equity allocations this year (compared to a 5 year average twice as high)…

coller2

But there is some good news for private equity managers.  In lockstep with their expectations of global economic growth, investors say that 2010 will be a killer vintage year for new private equity funds.  85% of global respondents said 2010 would be a “good” or “excellent” year to invest in private equity while a whopping 94% of North American respondents felt this way.

Still, 2009 has left some scares.  Investors are now twice as likely to cite “poor reporting/transparency” as a deterrent against more allocations in 2010.    In fact, investors cited a boat-load of reasons why they may not re-up their commitments this year.  The only factor that seems to have come off their list of worries is “style drift” – probably because a dearth of investment opportunities means their manager is simply unable to “drift” anywhere.

coller3

As self-described “leading global investor in private equity secondaries,” Coller has more than a passing interest in secondary market dynamics.  The firm reports that since mid-2007 when the wheels started to fall off financial markets, the reasons cited by investors for dumping PE stakes on secondary markets have changed markedly.

Survey respondents said that “increased liquidity” and portfolio rebalancing (across their PE holdings) were now the primary motivation for selling stakes on the used fund market.  Back in 2007, these factors were distant runners-up to “refocusing on the best-performing GPs” and rebalancing across asset classes.

coller4

Finally, Coller asked investors about their views on placement agents.  It’s been a rough year for these third party marketing professionals as several major institutional investors have identified what they view as inappropriate relationships between placement agents and fiduciaries.  But even after the ensuing brouhaha, it seems that the vast majority of investors don’t plan to tighten up their rules.

coller5

Be Sociable, Share!

Leave A Reply

← Hedge funds and investors to have a tearful reunion in 2010? Study aims to shed light on "darkness" in hedge fund databases →