LPs to Reduce Exposure to Funds-of-Funds and Diversify GP Relationships

NEW YORK, Jan. 18, 2011 /PRNewswire/ -- Private equity investors' (LPs') total exposure to funds-of-funds will fall over the next 3 years, according to Coller Capital's latest Global Private Equity Barometer. High costs are cited by half of investors planning a reduced funds-of-funds exposure, and disappointing returns are cited by one third (36%).

The number of investors refusing to commit to new funds from their current GPs has also reached a record high. 91% of European investors have increased their 're-up' refusals compared with just 63% two years ago, while the proportion of Asia-Pacific LPs refusing re-ups has also grown (from 52% two years ago to 70% now).

However, reduced funds-of-funds usage and more 're-up' refusals do not mean LPs are becoming less adventurous – four fifths (81%) of LPs plan to add new GP relationships over the next 2-3 years.

Commenting on the Barometer's findings, Jeremy Coller, CIO of Coller Capital, said: "Limited Partners' plans to reduce their exposure to funds-of-funds illustrate two important industry dynamics: the continuing growth in investors' skills and confidence – enabling more LPs to commit directly to GPs they like – and the more demanding nature of private equity investors as a group. There will certainly continue to be investor demand for funds-of-funds in the private equity industry, but firms that cannot demonstrate a good track record and strong value-add will increasingly fall by the wayside."

Indeed, confidence in private equity as an asset class remains strong: with one third of LPs planning an increase in their target allocation over the next year (compared with 16% of LPs planning a reduced target); and 60% of LPs planning to increase their volume of new fund commitments in 2011. In many cases, though, the increase in 2011 (over 2010) will be modest.

Investors have particularly high expectations for their GPs' 2010 and 2011 deals – 60% of LPs expect these investments to achieve returns of 16% or more – and this optimism is helping to boost their medium-term return expectations from the asset class. One third of LPs expect annual net returns of 16% or more in the next 3-5 years (up from 29% of LPs last year) – a return to the level seen in the Winter 2005-06 Barometer.

However, half of LPs working for corporate and public pension funds believe their institutions are not currently maximizing their returns from the asset class – they think they would be able to improve their private equity returns by hiring additional investment staff.

Venture capital investing

Venture capital investing will continue to be challenging, investors think. Indeed, one fifth of LPs believe no venture capital firms will generate consistently strong returns over the next decade, and two thirds of LPs think such returns will only be achieved by a small number of venture GPs worldwide. A mere 3% of investors believe European venture capital will deliver consistently strong returns over the next ten years.

Moreover, one third or more of LPs in Europe and Asia-Pacific believe the climate for venture capital investing is getting worse (vs 15% and 21% of LPs respectively that believe it is improving). Only in North America do more LPs see an improving VC climate than a deteriorating one.

Early-stage companies in Europe and Asia-Pacific are also being starved of venture capital funding, investors think. 57% of European LPs and 63% of Asia-Pacific LPs believe this, though only one third (37%) of North American investors think the same is true in their region.

Environmental, social and governance (ESG) investment criteria

ESG considerations have a significant impact on LPs' investment decisions only in Europe. Two thirds of European Limited Partners say ESG factors are important – whereas just one fifth of North American LPs and one quarter of Asia-Pacific LPs say the same.

About Coller Capital

Coller Capital, founded in 1990, is the leading global investor in private equity secondaries – the purchase of original investors' stakes in PE funds (venture capital, buyout and mezzanine) or the acquisition of portfolios of companies from corporate owners/backers. The firm has approximately $8 billion under management and a truly global reach. Coller Capital's investments range in size from $1 million to more than $1 billion. The firm's current fund, Coller International Partners V, has capital commitments of $4.8 billion and participation from 200 of the world's leading institutional investors.

SOURCE Coller Capital