Perseverance is a virtue

01 July 2009

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Investors in private equity will reap less reward from their investments than they have in recent years. This is not surprising: yesteryear's stellar returns were disproportionate and were largely buoyed by leverage, meaning the risk:reward profile was skewed. The latest Coller Barometer reveals that three quarters of LPs expect distributions to deteriorate in the next year (see page 20)

The silver lining (yes, there is one) is the separation of wheat from chaff. But whereas the phrase became cliched by LPs talking about fund manager selection, it could now refer to GPs' reliance on their LPs.

In the decade that saw buyouts come of age in Europe, many LPs did too. Your editor recalls ringing round local authority pension funds (LAPF) seven years ago to try and convince them to attend a session on private equity. Many were completely unaware of the asset class, let alone its merits: a study by WM Company revealed that in 2000 the asset class vastly outperformed other investment classes for the small portion of LAPFs investing there. Fast forward a few years, and most had met with advisers about getting involved.

Many non-specialist investors (not just LAPFs by any means) caught the returns-fuelled bug, and so fund sizes swelled. During this time many investors became very sophisticated. But some did not, and their burning fingers are now attracting moths in the form of secondaries players.

Keeping up momentum in today's climate is akin to full steam ahead. CalPERS' announcement to increase its private equity allocation was simply a reflection of the decreased value of the rest of its crumbling portfolio, not an indication of increasing absolute sums into the asset. But it nevertheless highlights the fact that sophisticated, seasoned investors understand the long-term nature of the beast.

They will be rewarded for this in the future: LPs that stuck with it in the dotcom crash were granted entry into top-tier venture funds when the dust settled years later, eventually going on to prove superior returns. As one LP told your editor at the height of the over-commitment boom in 2007: "If you weren't in Kleiner Perkins 20 years ago, you will not get in now."

Yours sincerely,

Kimberly Romaine, Editor-in-chief, unquote"; Tel: +44 20 7004 7526; kimberly.romaine@incisivemedia.com.