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Key influencers at pension funds 'sceptical' of private equity

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GLOBAL – More than one-third of pension fund respondents to Coller Capital's latest Global Private Equity Barometer, and 43% of endowments and foundations, said they faced "influential colleagues" who think private equity allocations should be reduced or even removed entirely.

The numbers jump for these three types of institution relative to family offices, banks and asset managers (less than 25%) or insurance companies and sovereign wealth funds (less than 20%).

Coller Capital was unable to speculate on why these institutions harboured such influential sceptics, but CIO Jeremy Coller warned that while private equity had confirmed its core place in institutional portfolios, complacency would be mistaken.

"With sceptics at senior levels within LP organisations, the industry will have to justify its performance again and again," he said.

Elsewhere, the survey suggests it is doing so.

LPs plan to have increased their allocations to private equity in 12 months' time – as opposed to hedge funds, where the split between planned increases and decreases is a much closer-run thing.

Coller partner Stephen Ziff said: "Taking the temperature of LPs on private equity, we see appetite to increase exposure.

"And this is while you have returns that are still seeing the impact of the crisis and have yet to benefit from the activity we've seen in the public markets so far this year."  

But the survey also flagged a number of problems.

Thirty percent of LPs said they would be slowing their rate of new commitments in response to the current record volume of unrealised company value in their funds, while almost 10% will resort to secondary-market sales – although two-thirds saw no reason to act, and almost 5% said they would actually increase their allocation in response to this difficulty around exits.

Slow markets have also led to a large volume of uninvested commitments in funds nearing the end of their investment periods, and 87% of LPs fear the deployment of all this dry powder is starting to inflate prices.

"We are seeing funds going out to seek extensions – so there are attempts to try and remedy this situation," said Ziff.

This may explain the lack of appetite for large buyouts revealed by the survey, alongside LPs' expectation that corporates will be spending their cash on M&A over the next 2-3 years and thereby bidding-up the prices of the enterprises that private equity funds compete for.

Instead, the survey finds LPs anticipating the best investment opportunities for the next two years coming from corporate divestments and spin-offs, as well as an unusually large proportion – almost 60% – favouring bankruptcy and Chapter 11 opportunities in Europe and North America.

"You see the most bankruptcies as economies come out of recession," Ziff said.

"There has been a reluctance to force companies into bankruptcy so far – a lot of so-called 'amend-and-extend' – but as the green shoots start to come through, that often begins to change."  

The focus on distressed opportunities fits with a broader credit theme, with the survey revealing that 34% of LPs plan to increase their target allocation to credit over the next 12 months.

Half of the LPs surveyed have already invested in or are considering the private debt funds that have proliferated since the financial crisis to step into the financing gap left by de-leveraging banks.

By comparison, between a third and a half of LPs have commitments to funds-of-funds and venture capital, according to Coller.

Ziff said: "Credit is a theme that has come through in a number of market surveys."

Regionally, Europe comes out well from the survey, with 76% of LPs rating it as an attractive investment destination over the next 1-2 years.

But this is cautious optimism. While 37% expect private equity firms to find "many" good investment opportunities in Northern Europe, only 11% say the same about Southern Europe.

"It appears LPs still haven't got comfortable that the problems facing Southern Europe have been resolved," said Ziff.

Coller Capital's Global Private Equity Barometer is a twice-yearly survey of institutional investors.

Arbor Square Associates questioned 140 investors, 42% of which are based in Europe and 25% of which are pension funds.

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