One in five LPs to cut GP relationships

John Bakie
20 June 2011

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One in five European LPs expect to cut the number of GPs they invest with over the next two years, according to Coller Capital’s Global Private Equity Barometer.

Coller believes LPs are increasingly seeking out the best fund managers, and those who fail to consistently perform could go out of business.

Though the proportion of LPs cutting GP relationships in Europe is only expected to be around half that expected in the US (where 38% say they will reduce the numbers of managers they fund), it could be worrying for those looking to raise capital in the coming months.

The Barometer, based on research conducted with IE Consulting, suggests the trend is being driven by poor lifetime returns from private equity among many LPs, with 51% saying their PE portfolio returns amount to less than 10%.

In addition, many LPs are expected to ramp up their direct investment activities, putting them in competition against GPs for deals. Currently, around half of LPs invest directly in private companies, but 41% of these say they will expand this in the next three years.

The findings point to a continued increase in competition among GPs to attract a limited pool of LP capital. Those managers with a strong track record are expected to fare well, while some managers are expected to go out of business as they fail to raise the funds needed in a tough environment.