Commitment issues

01 July 2008

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Establishing the true nature of LP investment intentions is a difficult task in the current market. Coller Capital's recent private equity Barometer suggested that a majority of LPs were concerned that as GPs find 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 will significantly exceed inflows. It would be natural to assume that these two concerns might prompt a period of reflection by LPs or a re-shaping of the portfolio away from private equity. Not so, according to the survey. Nearly 40% of respondents plan to increase their allocation to private equity with only a tiny minority planning to decrease their allocation. These results suggest that while they are cautious about the future, LPs have decided that private equity is the asset class perhaps best-placed to withstand the economic downturn and continue to out-perform most other asset classes

One investor group that, historically, has had low exposure to private equity is UK pension funds, with conservative trustees reluctant to sacrifice liquidity for higher returns. However, there are signs that this mentality is now shifting. The £1bn Somerset County Council pension fund recently announced a £30m tender for a fund-of-funds manager while the UK's second largest pension fund, the Universities Superannuation Scheme (USS), has announced a $750m commitment to Boston-based Constitution Capital Partners with the intention of increasing its alternative exposure from 5% to 20%. Although both are encouraging signs, Somerset's £30m allocation represents only 3% of its total portfolio and the USS cash is going to the US. The wisdom of investing such a large chunk of cash in a first-time fund with a focus on US buyouts in the current environment is also questionable. USS is invested in a number of European buyout funds and may be underexposed to the US mid-market but this decision certainly looks like a brave one. 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 venture. The LP love affair with private equity is a confused one.

Yours sincerely,

Nathan Williams

Editor, unquote"

Tel: +44 20 7004 7449

nathan.williams@incisivemedia.com.