PE has become more attractive after the global financial crisis: Coller Capital:

 

 

Mumbai: Private equity (PE) has become more attractive as an asset class in the wake of the global financial crisis, according to Coller Capital’s 19th edition of the Global Private Equity Barometer, a study based on the views of 113 investors across the globe and released on 9 December.

Over one-third (37%) of limited partners (LPs, investors in PE funds) are planning to increase their target allocation over the next 12 months, and many of the world’s largest investors are planning to grow the size of their PE teams. 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.

“Why are investors focusing more and more on private equity?” asked Jeremy Coller, chief investment officer of Coller Capital, which is one of the top investment firms in the international secondary market, where one PE fund buys another fund’s stake. “It’s simple. Returns. In a low-return world, 86% of LPs are forecasting annual net returns of over 11% from their PE portfolios, and a quarter are expecting net returns of 16% plus. Where else can you get that level of net return with such consistency?”

With the dust of the financial crisis having settled, LPs see private equity’s model as having stood the test of time. The majority of investors (62%) think hurdle rates (minimum rate of return) should remain at around their current level for the next 5-10 years, the report said.

The LPs’ optimism could benefit India, according to Sanjeev Krishnan, executive director of PricewaterhouseCoopers, a consultancy. “It is a good thing, there are a lot of India-focused funds that are in the process of a fund-raise now. While LPs are optimistic, it is all about the geographies they want to invest in,” Krishnan said. “LPs will have selective focus on the emerging markets, including India.”

Currency fluctuations as seen in emerging markets, particularly in India, continue to be the foremost cause of worry for LPs, he said. “Choice of general partners is another issue. Due diligence on GPs is very intense these days,” Krishnan said.

Three quarters of LPs (73%) say the reduction in PE returns since the onset of the global financial crisis is partly structural, rather than a purely cyclical phenomenon. As much as 42% of LPs plan to sell assets in the secondary market in the next two years. Investors continue to see the secondary market as an important tool for changing the overall composition of their portfolios.

Market conditions over the next 1-2 years will be increasingly buoyant, investors believe. Over half of LPs (56%) think the rate of distribution from private equity funds will increase over the next 12-18 months and 42% of investors expect their GPs’ investment pace to increase.

Co-investing alongside general partners (GPs or fund managers) has continued to grow in popularity, and is now an indispensable tool in the limited partner’s armoury: over half of LPs (54%) have co-invested with their GPs in the last two years. Two-thirds of North American LPs and half of European LPs say they would like to be offered more co-investments, according to the report.

On the other hand, only one-third of private equity investors invest in GP-sponsored initial public offerings (IPOs). This is not principally because they think GP-sponsored IPOs are overpriced (though a fifth of investors do think that), but because many LPs are of the opinion all IPOs are over-priced, the report said.

According to the Barometer, LPs are still reducing their exposure to large buyouts and venture capital, and increasing exposure to growth capital and small-to-mid-market buyouts, in both North America and Europe – as they have been doing for the last few years. A quarter of LPs also plan to begin investing, or to expand investment, in Africa over the next 2-3 years.

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 impact 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% of private equity investors dismiss initiatives such as asteroid mining and the Los Angeles-San Francisco Hyperloop as ‘rich men’s vanity projects’. Hyperloop is an ultramodern solar-powered vehicle that promises to help people travel between cities at nearly sonic speeds.

 

anand maurya

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