Coller Capital’s 15th Global Private Equity Barometer, Winter 2011-12

• Europe’s sovereign debt crisis will deter one in five PE investors
• Half of LPs have ‘zombie’ funds in their portfolios – and see no solutions for them in most cases
• Investors regard the re-financing of existing buyout debt as a major challenge for the industry
• 93% of LPs will refuse re-ups in the next 18 months – and reductions in commitments will be common

Private equity investors (LPs) see major challenges for the industry in the next few years, according to Coller Capital’s latest Global Private Equity Barometer – but despite these worries they think 2012 will be a good vintage year and they expect strong medium-term returns from their private equity portfolios.

Fallout from the bubble years is very visible to private equity investors. Half of LPs believe they have ‘zombie’ funds in their portfolios – that is, situations in which private equity managers (GPs) with no prospect of earning carried interest are motivated to keep funds going for their management fees. Neither are investors optimistic about their ability to remedy these ‘zombie’ fund situations: 72% of LPs think they will find solutions in only a minority of cases; a further 22% of LPs expect none of these situations to be susceptible of remedy. With the fragile state of today’s credit markets, the majority of investors also think re-financing the ‘wall’ of buyout debt due to mature in 2013-15 represents a major risk to the industry.

Despite these worries, investors generally believe 2012 will be a good or excellent vintage year – over two thirds of North American LPs share this view – and their 3-5 year return expectations for private equity have almost returned to pre-crisis (Winter 2007-08) levels: one third of LPs expect returns of 16%+ from their private equity portfolios; half of LPs expect returns of 11-15%.

Investors’ PE exposure – the sovereign debt crisis, and fund extension requests

One fifth of LPs around the world say they will reduce their private equity exposure to Europe because of the sovereign debt crisis. However, this does not imply a reduction in investors’ overall private equity exposure. On a global exposure basis, 17% of investors intend to reduce the share of their assets targeted at private equity, but this proportion is exceeded by the 24% of LPs planning an increased allocation.

Set against this, established GPs already hold large volumes of un-invested LP money: 87% of private equity investors have already received ‘investment period’ extension requests for some funds in their portfolios, and 78% of LPs expect to receive more such requests in the next 2-3 years.

The fundraising environment

Partly for these reasons, the fundraising environment will remain challenging. 93% of the world’s private equity investors expect to reject some ‘re-up’ requests from their GPs in the next 18 months – with a ‘typical’ investor refusing about a quarter of requests (though this proportion will vary considerably across the LP universe). Moreover, many investors will offer reduced commitments even to GPs with whom they do re-up: only one third of LPs say they will maintain commitment levels to all the GPs with whom they re-invest in the next 18 months.

These fundraising challenges are exacerbated by the pressure on LPs to delay even the commitments they do make.

Only one in five LPs expects to participate in the ‘first close’ of the majority of funds to which it commits; 17% of LPs say they will never make a first close.

A large majority (almost four fifths) of investors believe that the net effect of these industry dynamics will be a continuing improvement in the terms and conditions they are offered by fundraising GPs.

Additional Barometer findings

This edition of the Barometer also charts investors’ plans and opinions on the following topics:

• Investment intentions in Europe and North America
• Sources of attractive PE transactions for GPs
• Expectations for GP investment pace
• Returns from ‘club’ deals