New Coller Barometer: LPs to refocus portfolios

The private equity industry is refocusing its portfolios. This task of refocusing will, according to Coller Capital’s Global Private Equity Barometer, constitute the key reason why limited partners in the field will be selling assets in the secondary market over the next couple of years. Of those surveyed, more than half (52%) say they will be using the secondary market over the next two years. Most of those will be doing at least some selling (the buy-only figure is 19%). In fact, 88% of the LPs who will be selling say that re-focusing on the best performing GPs will be one of their reasons for doing so. Almost as many (84%) referenced boosting liquidity. Somewhat fewer (77%) referenced another sort of refocusing, among types of PEs. And another large majority (61%) said they would be selling to lock in returns. Most private equity investors welcome GP leadership in well-constructed secondary transactions (85%), with only a cranky 15% describing them as a “distortion of the PE model.” Those who welcome such transactions say they increase optionality for both sides, LP and GP. LPs on the Big Picture Looking at the big picture, LPs are bullish about private equity. Over four fifths of LPs expect to achieve annual net returns of more than 11% from across their private equity portfolios in the next 3-5 years. A respectable chunk (13%) of the private equity investors forecast net returns above 16%. Another revelation from this barometer: despite all the attention that special purpose acquisition companies have received through 2020 -- so much attention, one might be forgiven for thinking that a SPAC is a mutant form of the coronavirus -- they haven’t made much of a dent in the planning of LPs. Coller Capital is a London based private markets secondaries investor. Its Global Private Equity Barometer is an established snapshot of real-time trends in the industry. Twice a year, since 2004, Coller has given us this overview of the outlooks of institutional investors in PE. The Winter 2019 report displayed some prescience. It indicated that between 70 and 80% of Asia-Pacific and North American LPs were of the view that an economic downturn was on the way and that they needed to modify their portfolios accordingly. The Summer 2020 report informed us, among much else, nearly three quarters of LPs (73%) expected AUM in the industry to become more concentrated, and only 5% expected it to become less so. Lisa Sun, a principal at Coller’s New York office, noted in a recent exclusive interview with Alternatives Watch that there had been a pickup in secondary activity in the second half of the year. The new report, for Winter 2020-21, is based on fieldwork by Arbor Square Associates, which took place between mid-September and mid-October 2020. Arbor Square engaged 113 investors in PE firms in North America, Europe, and the Asia-Pacific region (including the Middle East). SPACs? Meh As noted, these 113 investors were not especially enamored of SPACs as investment vehicles. Almost two-thirds (64%) believe that SPACs will prove to be a temporary/cyclical phenomenon. Among investors in North America specifically, the ‘it’s-all-a-fad’ opinion is even more prevalent, almost three quarters. Only 4% of LPs believe that SPACs offer a risk/return trade-off superior to that of the PE industry, 25% see the two asset classes as roughly equal, the remaining 71% see PEs as superior. As one might expect then, not many PE investors report recently having invested in a SPAC. Only 10% say they have, with another 4% saying that, though they haven’t yet, they plan to do so in the near future. This leaves an impressive 86% saying “neither.” The LPs surveyed were also rather cautious about real estate and about hedge funds. The report speaks of the institutional PE investors as still experiencing an “apparently relentless decline” of appetite for hedge funds. They are enthusiastic, on the other hand, about a sector focus. Almost two-thirds of the Asia-Pacific investors say that they will increase the sector focus of their PE programs, as do healthy sized minorities of those from the rest of the world. Which sectors are most attractive? There is a lot of interest in biotech. And in the prospect of accessing that sector via venture/growth funds (as distinct from buyout funds). There is also a lot of interest in Internet-based retail, although in that field buyout funds are the preferred mode of access.

New Coller Barometer: LPs to refocus portfolios

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Christopher Faille

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Christopher Faille

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