Pension funds set to face defaults in PE commitments
GLOBAL - One in ten investors is expected by its peers to default on commitments made to private equity funds in the next years, the latest survey by Coller Capital revealed.
The firm's last edition of the Global Private Equity Barometer - which surveyed 120 investors in private equity (limited partners) from around the world, 26% of which are pension funds - unveiled the investors' community will still have trouble meeting private equity fund managers' capital calls.
Many investors, including large pension funds, have already had to downsize their allocation to this asset class, due to losses realized in the past months.
Coller Capital principal Stephen Ziff said: "In these cases, LPs would try to engage in a dialogue with the GP (general partner) and try to find alternative remedies to the defaulting. In practice the number of investors defaulting would be very small, because it would bring into the situation contractual and reputation issues, which LPs clearly want to minimise."
The firm also claims the relationship between LPs and GPs will change over the next few years. Around four fifths of the LPs surveyed expect the terms and conditions of new buyout funds to become more favourable to them and two thirds of LPs expect the same for new venture funds.
Ziff said: "Given the economic climate and the scarcity of allocations to private equity, the survey tends to indicate LPs will be in a stronger position to negotiate with GPs on their private equity investments."
In addition, there is widespread belief many existing private equity fund managers will disappear, amid increasing economic difficulties and mounting regulatory pressures.
Findings show many investors are worried that regulatory and tax changes - discussed at both US and European Union level - will inflict more far-reaching damage on the asset class. Half of LPs think this is likely to happen in Europe, and more than half expect the same to happen in North America.
Coller Capital chief investment officer Jeremy Coller said: "Scarce capital, slower returns and political uncertainty are the immediate future for our industry. Living with these conditions will require all our celebrated spirit of partnership.
"LPs will need to be both patient and realistic. GPs will need to adapt quickly to investors' changing requirements. Above all, LPs and GPs will need to stand together in the face of any ill-considered policy initiatives. It would be all too easy to break private equity's alignment-based model by regulating away its flexibility or taxing away its incentives."
Many investors, including large pension funds, have already had to downsize their allocation to this asset class, due to losses realized in the past months.
Coller Capital principal Stephen Ziff said: "In these cases, LPs would try to engage in a dialogue with the GP (general partner) and try to find alternative remedies to the defaulting. In practice the number of investors defaulting would be very small, because it would bring into the situation contractual and reputation issues, which LPs clearly want to minimise."
The firm also claims the relationship between LPs and GPs will change over the next few years. Around four fifths of the LPs surveyed expect the terms and conditions of new buyout funds to become more favourable to them and two thirds of LPs expect the same for new venture funds.
Ziff said: "Given the economic climate and the scarcity of allocations to private equity, the survey tends to indicate LPs will be in a stronger position to negotiate with GPs on their private equity investments."
In addition, there is widespread belief many existing private equity fund managers will disappear, amid increasing economic difficulties and mounting regulatory pressures.
Findings show many investors are worried that regulatory and tax changes - discussed at both US and European Union level - will inflict more far-reaching damage on the asset class. Half of LPs think this is likely to happen in Europe, and more than half expect the same to happen in North America.
Coller Capital chief investment officer Jeremy Coller said: "Scarce capital, slower returns and political uncertainty are the immediate future for our industry. Living with these conditions will require all our celebrated spirit of partnership.
"LPs will need to be both patient and realistic. GPs will need to adapt quickly to investors' changing requirements. Above all, LPs and GPs will need to stand together in the face of any ill-considered policy initiatives. It would be all too easy to break private equity's alignment-based model by regulating away its flexibility or taxing away its incentives."
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