LP survey highlights buyout/venture divide

A new study shows views among limited partners regarding the relative prospects of buyout and venture funds are strongly polarised.

Limited partners have sharply contrasting views of the attractiveness and likely performance of buyout and venture funds, according to the latest version of the twice-yearly “Global Private Equity Barometer” survey produced by Coller Capital, the London-based private equity secondaries investor.

Asked to rank six categories of investment in order of attractiveness over the next 12 months, 105 limited partners from around the world placed European buyouts first, Asian buyouts second and North American buyouts third. Despite the stellar returns achieved by some of the States’ best-of-breed early-stage investors over the years, North American venture was ranked only fourth, ahead of Asian venture in fifth and European venture in sixth.

The rankings reflect the predictions of limited partners regarding likely returns from their private equity investments. Seventy-nine percent expect a net return of more than ten percent from their European buyout investments over the next three to five years, while 76 percent expect that level of return from North American buyouts and 74 percent from Asian buyouts.

By contrast, only 60 percent expect a ten percent-plus return from European venture, compared with figures of 66 percent for North American venture and 73 percent for Asian venture.

The mood of venture funds will not be brightened by news that they are in the firing line of investors seeking better terms and conditions. This is particularly applicable to European venture funds, where 37 percent of limited partners expect terms and conditions to improve in 2005. This figure is only beaten by the 41 percent of limited partners anticipating better terms and conditions from funds of funds.

Between 90 to 98 percent of investors in each category expect terms and conditions either to remain the same or to change in their favour in the next 12 months.

Among the survey’s other key findings, it was revealed that 56 percent of limited partners expected to increase their allocation to alternative assets over the coming year, with almost none expecting to reduce it. More than 43 percent of investors expected to increase their private equity allocation.

In addition, 42 percent of investors are currently below their target allocations to private equity, with 32 percent up to five percent below the target and ten percent from six to ten percent beneath the target. Fifty six percent say they are approximately at their target allocations, while two percent are over committed.