Trouble ahead

The latest edition of Coller Capital's Global Private Equity Barometer, a half-yearly LP sentiment report produced by IE Consulting, was released today, with the results displaying a pessimistic outlook on the part of the industry's investors. Average expectations are that a quarter of GPs will fail to raise a follow-on fund in the coming seven years - effectively putting them out of business - and that a tenth of all LPs will default on commitments in the next 24 months.

The gloomy mood was even more evident in terms of returns expectations, with a staggering 74% of respondents stating that they anticipate distributions across their portfolio to decline in the coming year - the highest figure since the Barometer was first published in 2004. Only 37% of investors are now reporting a new return of 16% or more for private equity, significantly down on the peak of 45% in summer 2007.

The worry for GPs is that this bleak assessment of prospects will push investors away from the asset class: on this evidence such concerns would be well founded. A fifth of those surveyed suggested that they intend to reduce their allocation in the coming year, a huge rise on the 3-6% that has been recorded in previous editions of the report. In fact, an astonishing 84% have already refused a re-up request in the past 12 months, while a third are planning less GP relationships over the next two years.

Not only is money going to be harder to come by, but the terms on which it is given are expected to swing more in favour of LPs. Around 80% of respondents anticipate an improvement in terms and conditions from buyout funds, while 64% expect a similar trend in the venture space.

So what issues should GPs be particularly aware of if they are to maintain their investor base? One main concern appears to be reporting standards, with between a half and three quarters of investors in different regions answering that the transparency of their fund managers needs to improve. And with close to a quarter stating that they will increase the size of their private equity teams, expect the diligence to be tough and investors to get far more hands-on post-commitment.

There are also worries regarding strategy shift, with a good deal of uncertainty expressed regarding some of the new alternative deal sources. In particular, two thirds of respondents said they were unhappy with the concept of PIPE transactions, while views were much more mixed when it came to debt buy-backs: 58% of European LPs are in favour of such investments, compared to just 35% of North American investors.

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