GLOBAL - The latest quarterly Global Private Equity Barometer from Coller Capital suggests European institutional investors have mixed feelings about the asset class. Half said they have an unfavourable view of private equity and few expect the bumper bull market returns to come back, but a big majority say 2010 will be a good vintage for the sector.

Evidence from the Barometer indicated European investors are much more disgruntled than their North American peers about recent activity as only 28% of those limited partners (LPs) said they have an unfavourable opinion of private equity; and whereas three-fifths of Europeans say they are dissatisfied with recent performance, the same proportion of North American LPs say they are satisfied.

There is more agreement between investors in the two regions that annual net returns of more than 16% are now much less likely: only 29% said they anticipated to see that performance now, as opposed to 43% this time last year.

In contrast, 85% of the LPs questioned said they believe 2010 will be a "good" or "excellent" vintage, while only 2% expect it to be "poor".

Are they venting frustration that they have bought at the top of the market, and have left themselves no capital to allocate at the bottom of that market? Coller Capital's CIO Jeremy Coller thinks not.

"Private equity has proved disappointing for some investors, but it's in the same boat as other asset classes, so we should see investors' disappointment as relative," he said. "Unlike US investors, many European LPs have been building up their allocations as they felt their way into the asset class. Some may now pause for breath, but does that mean they won't put their target allocations up again in the future? I don't think so - European investors on average still have smaller target allocations than their US counterparts. The problem for fundraising GPs is that LPs have had little or no cash back from their portfolios recently and many of their prior commitments remain unfunded."

The survey also found that 70% of LPs are planning to maintain their target allocation for the next year, although this follows several years' continuous growth in those allocations.

Two-thirds of investors said they have changed the way they have managed their portfolios since the credit crunch, with 40% taking steps to beef-up internal teams, half tightening due diligence procedures and demanding better reporting and 60% modifying their investment criteria.

Factors deterring LPs from reinvesting with general partners (GPs) have also changed dramatically as nearly 80% cited terms and conditions as being important in decision-making, as well as poor reporting, compared with approximately half last year. Conflicts of interest and the way carried interest is shared between LP and GP have also become more important. However, none of this has been at the expense of the importance of the performance of the GPs' last fund - which means that, more than ever, LPs will now have to balance their need for best practice with their desire for best returns.

"LPs recognise that there will be a much greater dispersion of returns between genuinely skilled and less-skilled fund managers," said Coller. "Investors don't think they should be pulling out of private equity, but they know they need to be more pro-active."

Three-quarters of European LPs also said they expect there to be a "major uptick" in capital calls next year, which could place LPs under pressure for liquidity and force them to start accepting buyers' offers for holdings in the secondary market. On the other hand, 65% of LPs expect the exit environment to improve and cash distributions to go up, compared with the opinion of 9% of investors three months ago. The balance between these two factors may determine how pricing develops in the secondaries market next year.

This latest Barometer was based on a survey of 108 investment institutions, 38% of which are European and 34% of which are pension funds.