GLOBAL – Almost two-thirds of limited partners (LPs) in the private equity market anticipate increased levels of default across European buyout transactions in the next few years, Coller Capital has said.
Publishing its latest Global Private Equity Barometer, an increasing number of private equity investors also said investment opportunities in China were beginning to look less attractive – with more than two in five saying the risk/reward balance in the country was deteriorating.
Jeremy Coller, CIO of the eponymous company, also sought to highlight survey results that seemingly indicated that investors with more performance-related remuneration outperformed the market.
"Take a pension plan," he said. "It can only achieve strong returns from private equity by consistently selecting the right managers – and to do that, you need talented, experienced and motivated people doing the selecting."
He argued that underpaying was not in the interest of pensioners, with more than half of LPs seeing net annual returns exceeding 11% since 2007.
Partner Stephen Ziff added that the lack of debt financing in Europe would also have an impact on the level of transactions in Europe.
"LPs don't see it having a material impact on European returns relative to North America, but they do recognise there is a shortage of debt currently in the European market," Ziff added.
"They still think European buyouts offer a good level of return – clearly, they will think some opportunities will not be financed due to a shortage of debt.
"Similarly, they also anticipate an increase in the default rate as well. Almost two-thirds of LPs expect to see an increase in default rates in buyouts in Europe in the next 2-3 years."
At 65%, the expected default rate in Europe was almost double the expectation for Asia Pacific in the same timeframe and more than 40 percentage points higher than what investors in North America anticipated.
Commenting on the Asia-Pacific market, Ziff added: "LPs are of the opinion that investors in that region perhaps underestimated some of the political-regulatory risks and that currently, the risk/reward ratio for private equity is probably worse in China than it is in India, if you look to compare and contrast Asian markets."
More than 40% of respondents saw the risk/return opportunities in China deteriorating, compared with just over 10% of respondents to the survey who anticipated circumstances would improve, whereas a higher number of respondents had a more positive outlook for the Indian market.
Coller's report said further: "One-fifth of LPs are now focusing more attention on nascent Asian PE markets such as Indonesia and Vietnam, compared with the more developed markets of Australasia, Japan, Korea, India and China."