Coller barometer takes measure of LP attitudes

Establishing the true nature of limited partners' (LPs) investment intentions is difficult in the current market. Coller Capital's recent private equity Barometer suggests the majority of LPs are concerned that as GPs are finding it more difficult to allocate money to sectors and geographies where they possess most experience they will turn to areas where they have less experience. Alongside this so-called 'style-drift', LPs are also concerned that fewer investment opportunities will mean cash outflows significantly exceeding inflows. It would be natural to assume that these two concerns might prompt a period of reflection by LPs or a reshaping of the portfolio away from private equity. Not so, according to the survey. Almost 40% of respondents plan to up their private equity allocation with only a tiny minority planning to decrease it.

However, Jeremy Coller believes the seemingly contradictory responses actually reflect a "rational attitude". The growing appetite for private equity and alternative assets more generally is a structural shift. There is increasing recognition among investors, especially pension funds, that private equity's risk-adjusted returns are likely to exceed public market returns for the foreseeable future.

Coller also says that, while unlikely to reduce private equity exposure, investors will increasingly reshape their portfolios to focus on their best-performing GPs and to reflect new economic realities. "This might mean less US buyout exposure and a greater focus on emerging markets." While LPs are cautious about the future, they have decided private equity is best-placed to withstand the economic downturn and continue to outperform other asset classes.

On the question of 'strategy-drift', 74% of LPs perceive this as a threat to returns. Coller feels the technology crash legacy is one factor behind these concerns. "Many private equity investors were investing at the time of the tech bubble and some got their fingers burned as GPs threw themselves into areas where they hadn't played before. LPs start worrying when they think GPs are being tempted to go too far off-piste," he says. The survey also revealed LPs have rapidly adjusted to the new climate, with 42% expecting less of their cash to be called in the next 12 months, as opposed to 7% who thought the same thing this time last year. The investment slowdown is likely to see some GPs looking elsewhere for employment in the next year or so, adds Coller. "At the edges some GPs will not be able to raise a new fund."

UK pension funds have historically low private equity exposure, as conservative trustees are reluctant to sacrifice liquidity for higher returns. However, the mentality is shifting: the £1bn Somerset County Council pension fund recently announced a £30m tender for a fund-of-funds manager and the UK's second largest pension fund, the Universities Superannuation Scheme, declared a $750m commitment to Boston-based Constitution Capital Partners with the intention of increasing its alternative exposure from 5% to 20%. Although encouraging signs, Somerset's £30m allocation represents only 3% of its total portfolio and the USS cash is going to the US.

Investing such a large chunk of cash with a first-time fund with a focus on US buyouts in the current climate is questionable. USS is invested in a number of European buyout funds and may be underexposed to the US mid-market, but this decision is certainly brave. It also runs counter to the Coller findings where respondents placed North American buyouts fifth in the list of most attractive opportunities for investment over the coming year, behind Asia-Pacific and European venture. The LP love affair with private equity is a confused one.

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