LPs will compromise on returns to put money to work(1)

Being invested in a private equity fund, even if it produces below-benchmark returns, can be more attractive than having cash lying fallow, according to a survey by Palico.

Nearly half of limited partners will target lower returns if they can deploy an exceptionally large investment, according to a new survey by Palico, an online private equity marketplace.

Some 47 percent of LPs say they'll compromise on potential performance if it means they can put “an exceptionally large amount of money to work at once” instead of holding un-invested cash for a long period of time, Palico said in the report, Key Trends January-July 2017, which was released at the beginning of August. 

“[This] is probably best illustrated by the fundraising success of some recent long-dated PE funds, which propose investing money for 15 to 20 years despite targeting annual returns that are 100 to 200 basis points below the return promise of a 10-year fund from the same manager,” a spokesperson for Palico said.

This view was echoed by a number of LPs, particularly those from western and northern Europe.

“Some Nordic banks are charging negative interests on your overnight depos so even a lower interest makes sense, provided that the regulatory frameworks allows you to increase the exposure in PE,” said a spokesperson for a Scandinavian pension fund.

The survey also found that 53 percent of LPs and GPs are seeking an annual yield from at least a portion of their private equity investments, as growing holding periods and fund lifecycles force them to wait longer for capital gains. 

Among other findings, 51 percent of respondents said that a high level of dry powder for buyout strategies is driving them to “less crowded” private equity strategies with lower purchase prices, while 59 percent of LPs and GPs believe that, “amid high purchase prices”, the typical buyout fund formed today will not produce double-digit returns.

Each of the survey questions saw an average of 72 respondents from a geographically diverse mix of LPs and GPs, according to Palico.