Large LPs among most concerned about denominator effect – Coller Capital

These LPs are seeing a greater proportional impact from the denominator effect, with just 42% of the total LPs surveyed citing this as a factor. According to the research, 28% of the investors are also seeing their PE commitments slowed down by liquidity shortfalls.

Next year will be a challenging time to fundraise, Iyobosa Adeghe, principal at Coller Capital, told Unquote. “It’s not an optimal time for LPs to add significant additional risk when a lot of portfolios are already overweight in PE,” he said. “The desire to raise capital for new commitments has been a driver of secondaries activity – LPs have had visibility on their requirements for 2022 and 2023, and the secondaries market is a way to support that without drifting over their allocation limits.”

There are still reasons to be optimistic, according to Adeghe. “Although a lot has changed in the past year, what has remained steady is the fact that LPs still see private assets as a very valuable part of their portfolio,” he said. “They feel their portfolios are well positioned for the current market, but for the year ahead you would expect to see a slower pace of new investments, which is a function of the risk environment and over-allocation.”

Secondaries uptick
An upside to the situation is that it is likely to boost secondaries dealflow, particularly for LP stakes.

The share of LPs interested in selling assets on the secondaries market has grown to 20%, versus 13% in the Barometer research conducted two years ago. “This makes a good starting point for seeing quite significant volume in 2023,” Adeghe said. “This increasing level of interest is tied to market volatility, a desire to raise capital for new commitments, and the need to address overallocation to PE.”

Although LPs’ private equity commitments are likely to be affected by the current environment, their appetite for private credit has remained high, with LPs in all regions other than Asia-Pacific viewing public credit as less attractive than private credit in the current environment. Within private credit, senior direct lending strategies (44%) and special situations (43%) were considered the most attractive.

This continued interest in private credit will eventually trickle through to the growing credit secondaries market, Adeghe noted, although there will be “some level of lag”. “There has been a significant increase in the volume of private credit secondaries over time, which is also a function of there being more dedicated capital to underwrite to credit-like returns, with less of a bid-ask spread between LP and buyer,” he said. This pricing can make credit secondaries an attractive area, he added. “If an LP wants to sell a portfolio today for liquidity, private credit portfolios are currently pricing at a lower discount to NAV.”

Coller Capital held a USD 1.4bn final close for its debut credit secondaries fund in February 2022, as reported.

Thematic preferences
LPs have taken note of valuation volatility in the technology sector, with 45% saying that venture capital investments are now less attractive to them, versus 28% who believe the same for PE technology investments.

The survey also revealed that LPs are investing more in strategies with exposure to renewable energy and hydrocarbons versus four years ago. In the Winter 2018-19 Barometer, 50% of LPs planned to maintain or expand their renewables investments, versus 62% in the latest edition. Hydrocarbon investments have also increased in popularity, with 35% of LPs planning to maintain or increase investment in this area in the Winter 2018/19 edition, versus 38% in Winter 2022/23, plus an additional 4% who now plan to start investing in this area.

“Energy security in Europe is probably what has triggered that uptick in sentiment for hydrocarbons versus past surveys, so this might be a shorter-term trend, whereas renewables is an ongoing trend,” Adeghe said. “Any party in the market raising capital in either bucket has an interesting story to tell at the moment.”

GP stakes gains
The Barometer also surveyed LPs on GP stakes strategies, in which a sponsor raises capital to take a stake in the management company of a range of private equity firms, offering liquidity in return for exposure to management fee streams and a long-term incentive fee through carry.

Although only 30% of the LPs who took part in the survey have so far had exposure to these strategies, 27% of this group said that these strategies had exceeded their returns expectations, with just 9% saying they had underperformed, and the remaining 64% stating that they had performed in line with their expectations.

“It’s a long-term bet on PE and the stability of certain managers,” Adeghe said, highlighting the appeal of the strategy. “It’s no more risky than other PE strategies, it’s just fundamentally a strategy that is becoming of interest to LPs.”

Exit routes for these vehicles such as profitable IPOs have yet to play out, Adeghe noted. “But equally, we see these vehicles appear in LP secondaries portfolios quite often, so LPs can seek interim liquidity and don’t necessarily need to wait for an ultimate IPO,” he said. “This gives LPs comfort in making a commitment in the first place. Many secondaries players would consider buying these stakes as part of a broader portfolio transaction.”

The Winter 2022/23 Barometer research was carried out from September to November 2022 and saw participation from 112 LPs from North America (40%), Europe (39%) and Asia-Pacific (21%).

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