LP allocations still solid ... for now

Antoine Drean believes that, as far as private equity is concerned, the worst of the effects of the credit crunch are yet to come. This is a view that Charles Diehl agrees with, but states that "it is not too early to analyse the effects the current financial climate will have on LPs and their allocations since the credit crunch is bound to have further and lasting implications than we've seen yet".

How future LPs allocations are designated will largely depend on how GPs perform, how they will put their funds to work and the yields of the current vintages. Drean suggests that the financial situation will eventually see GPs cut into two categories in the eyes of LPs; the sensible ones who have talent and can add value to companies, and those who were simply riding the credit wave who will inevitably have problems in the future.

"There is no problem if large buyout houses aren't investing money. They should not invest if they cannot find the assets. In the past firms have gone 18 months between deals and this isn't a problem providing they can demonstrate they are looking. We would not wish them to deviate from their usual area of experience and monitor a change in direction very carefully. An extreme example is the venture boom when firms began investing in technology companies. We would rather not have our money invested," says John Gripton.

Helen Steers agrees, adding: "GPs should not bank the laurels of their past achievement to attract future LP investment and that LPs, such as Pantheon Ventures, are not only backwards looking when it comes to GPs but also forwards looking in both the quantities and qualitative terms." Drean states that the GPs divide in quality has yet to be fully assimilated by all LPs.

As we have seen since the beginning of the year in France, LPs still have a lot of funds to allocate. With the current downturn there are some inevitable trends emerging with the regards to LPs' interest such as the secondary market, distressed funds as well as mezzanine funds, specifically from Asia as demonstrated by unquote's data. However, while allocations will be similar they will be more spread out with fewer bigger bets in order to reduce risk.

Steers believes that LPs' broader geographical investments and diversification in the sectors will provide a better safeguard. Drean confides that there hasn't been so much in change in allocation by LPs than simply a greater number of LPs emerging. "From our Dubai office for example, we see a large number of family offices set up which are keen on investing as LPs in European private equity," he states.

Looking at the purchase of Cegelec by Qatari Diar, Diehl highlighted the potential for a trend in which Sovereign funds directly acquire French companies, bypassing GPs altogether. According to the unquote" summer barometer in association with Coller Capital, LPs believe the private equity asset class will continue to attract significant numbers of new investors for the foreseeable future, with 80% of existing private equity investors believing they will be joined by a significant number of their peers in the next three years. LPs believe that good private equity firms will continue to outperform the public equity markets over the next three years, and it is this, rather than a desire for diversification, that they believe will be the principal attraction for new investors.

Although most argue that it is too early to forecast the extent of the credit crunch, it has been emphasised by all that private equity is a long-term investment vehicle and that both LPs and GPs actions will only see a minimal change if any ... for now.

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