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Investors bringing private equity in-house, says Coller survey

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GLOBAL - Well over a third of US and European private equity investors will reduce or end their exposure to funds of funds over the next three years, and among pension funds, half believe they could improve returns if they were allowed to hire more investment staff.



The findings, from Coller Capital's latest semi-annual Global Private Equity Barometer survey of 120 limited partners (LPs), paint a clear picture of growing confidence among institutional investors as their private equity programmes mature.



Pension funds are the most convinced that they suffer from a staffing-related performance deficit.



Half of corporate funds and 47% of public funds worldwide believe their returns would improve if they could hire more investment professionals, compared with 20-30% of government organisations, banks, asset managers, insurance companies endowments and family offices.



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Will they do so? Perhaps, given the survey's other finding - that 43% of North American, 35% of European and 27% of Asia-Pacific funds-of-funds investors plan to reduce or end their exposure within three years, compared with only 13% planning an increase.



The move is largely about exerting more control - 60% say they are developing the ability to deal with general partners (GPs) directly - and cutting costs - 50% say funds of funds' costs are too high.



At the moment, a greater proportion of Asia-Pacific LPs use funds of funds (three-quarters) than US or European investors (half), but Europe's LPs are the most likely to use them to access GPs in every region, including their own.



And of the 15 LPs globally that describe their funds of funds as an outsourcing solution (in addition to their advantages for GP-access, diversification or sector- and region-specific exposures), 13 were European.



Moreover, if we isolate pension funds, use of funds of funds among European LPs jumps from half to two-thirds.



Overall, this might suggest European pension funds are the LPs most likely to be using funds of funds as an outsourcing solution, and therefore most likely to see greater in-house capability as a means of improving their private equity programmes.



Coller Capital partner Stephen Ziff said: "The statement that LPs think they can improve returns by building up in-house expertise is a pretty strong one, but it's fair to say your (assets under management) have to be sizeable to justify that kind of investment in the team."



Europe's LPs emerge as leaders with regard to applying ESG principles in their private equity programmes, with 64% saying they materially impact fund selections and almost one in five having mandates with direct ESG restrictions.



By contrast, only one in five US or Asia-Pacific LPs see ESG having a material impact on their selection process.



Perhaps surprisingly, the ESG issue radically divides the pension fund world: 71% of pension funds worldwide say ESG considerations play little or no role in fund selection, but 70% of pension funds in Europe regard ESG as important.



The latest Barometer finds LPs more confident in private equity as an asset class. Almost nine out of 10 expect returns of 11% or more from their portfolios over the next 3-5 years, twice as many intend to increase their target allocation as intend to decrease (34% versus 16%), and 60% plan to increase commitments during 2011 - with small and mid-sized buyout the most favoured sectors.  



However, re-up refusals - the decision by an LP not to commit to the new fund from a GP they already invest with - reached a new high for the Barometer, with Europeans in particular becoming more discerning about repeat business.



Ninety-one percent had refused to re-invest at least once over the past 12 months. For many, this will be a function of streamlining mature programmes that have become over-diversified with too many individual GPs.



By contrast, 81% of LPs intend to make commitments with new GPs over the next 2-3 years. In Asia-Pacific, programmes are still relatively immature, while North American and European LPs will establish new relationships as they re-shape mature portfolios.



Ziff said: "A strong theme that comes through in the survey is that LPs are becoming more and more confident in private equity as an asset class, but they are also becoming more discerning."



The latest Barometer is not forecasting wholly cloudless skies, however. Despite the overwhelming optimism on expected returns over the coming five years, 42% of LPs anticipate another downturn within that timeframe, and a full 76% are bracing themselves for tough times within seven years.



The survey represents the views of 120 investors. Seventeen percent were Asia Pacific-based, with the remainder split evenly between North America and Europe.



Twenty-four percent were pension funds and 19% insurance companies.


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