Private equity investors to make climate change shifts

Almost three in five European and Asia-Pacific investors plan to modify their private equity portfolios in the next five years to combat climate change, according to the latest Coller Capital Global Private Equity Barometer.

Limited partners (LPs) that do expect change to their investment strategies are broadly planning to replace oil and gas exposure with investment in renewable energy and climate-friendly products and services.

But less than a third of North American investors are planning a similar change.

The Barometer is based on the views of 113 private equity investors based in Europe, North America, and Asia Pacific including the Middle East, with research undertaken in September and October 2019.

According to the survey, LP commitments to private debt funds are plateauing, with equal proportions – 21% – planning to accelerate, or slow, their pace of commitment to private debt funds over the next two years.

Stephen Ziff, partner and co-head of investor relations and fundraising, Coller Capital, said: “This reflects where we are in the economic cycle, and the belief by investors that we are heading for a downturn.”

The survey showed that 45% of European investors believe their private equity portfolios need modifying to prepare them for the next economic downturn; North American and Asia-Pacific investors, however, were less sanguine, with 70% and 80%, respectively, planning to make the changes.

Nine out of 10 LPs recognise the significant risks to their medium-term private equity returns posed by today’s macro-environment and high asset prices.

Despite this economic background, 80% of LPs expect to achieve annual net returns of more than 11% from across their private equity portfolios in the next three to five years, while 15% of private equity investors are forecasting net returns of over 16%.

But over half – 55% – of LPs have had requested commitments scaled back on multiple occasions, most commonly in venture capital and mid-market buyout funds, for which one-third of LPs had to settle for smaller commitments.

However, co-investing continues to grow in popularity. Almost 70% of private equity investors now co-invest alongside GPs, while 44% of LPs actively pursue co-investment opportunities.