Allocation concerns dominant among LPs

According to the latest Coller Capital Global Private Equity Barometer, produced in association with private equity consultancy IE Consulting, limited partners are increasingly concerned about their private equity allocation, with two-thirds of respondents stating that they expect to reach or exceed their target allocation within the next 12 months.

The results are not surprising, with much ink currently being spilt in the financial press in relation to the 'denominator effect'; a term used to describe the process by which the percentage of an LPs portfolio represented by fixed, illiquid assets rises as a result of a substantial drop in the value of the liquid assets. In addition, there is much talk in the market of LPs knowingly over-allocating to strong performing buyout funds in recent years, with expectations that divestments from exits would allow them to meet ongoing draw-downs. However, with the number of private equity exits plummeting this option is largely unavailable.

The problems appear to be affecting North American LPs worst, with 29% of those surveyed stating that they expect to be over their target allocation by the end of 2009 - significantly more than in Europe or the Asia-Pacific region. One of the knock-on effects of these issues has been an increase in the number of LPs declining to re-allocate to an existing GP, with almost 4 out of every 5 North American LPs confirming a refusal to re-up in the last 12 months. More than 60% of European LPs and 52% of Asia-Pacific LPs also responded that they had declined a re-allocation request over the same period.

Despite this, many LPs expressed confidence in the medium-term prospects for the asset class, with 43% expecting a return of 16% or more on their portfolio in the next three to five years. Therefore, most ostensibly remain committed to the asset class; only 3% plan to decrease their target allocation in the coming year, which is broadly in line with stated intentions in recent years.

There was a general consensus that the recent swathe of large-cap buyout funds will be hit hardest by the economic downturn, with 69% of LPs anticipating a median net return of less than 1.5x from the current crop of mega-buyout funds. Unsurprisingly, small buyouts were highlighted as being likely to outperform other buyouts. Around 41% of respondents expect a median multiple of at least 2x - compared to 26% and 5% for mid-market and large-cap buyouts respectively.

In terms of geographic preference, the majority of investors suggested that the best opportunities for investment would be in the Asia-Pacific region over the next 12 months. Indeed, LPs from across the globe indicated a desire to increase their exposure to this region in the next three years, with India and China selected as the most favoured investment destinations. Respondents also indicated a desire to increase exposure to the Middle East, with 48% of Asia-Pacific LPs, 32% of North American LPs and 21% of European investors planning to target some of their private equity investment at the region in the next three years.

The study captured the views of a representative sample of 107 private equity investors from all round the world. IE Consulting, a division of Incisive Media, has been conducting private equity research for 20 years.

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