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Brexit uncertainty sinks LP appetite for UK funds, global demand remains robust

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Brexit uncertainty has seen LP sentiment for future commitments to UK private equity commitments nosedive, new research suggests.

The latest Rede Liquidity Index survey of 144 of the world’s largest institutional investors shows the UK’s incredibly strong figures from H1 suffer a hefty downswing, causing a knock-on reduction of market sentiment in the overall figures for Europe.

Rede Partners’ survery uses a baseline score of 50 to represent no change in investor sentiment, with a score above 50 indicating an expectation to increase private equity commitment over the next 12 months and a score beneath indicating an expectation to deploy less.

Despite remaining above the crucial 50 mark, the UK’s RLI score dropped from 73 in H1 2018 to 55 in the H2 report, dragging down Europe’s market sentiment figure to 61.

As allocation expectations have come down for UK LPs, so have their expectations of distributions from the asset class (42).

Rede Partners said that drop in sentiment had been felt across the European continent, as the region as a whole produced a score of 52 for distribution expectations, down 11 points on H1 2018.

About 90 per cent of LPs surveyed by Rede Partners for the latest report expect to increase or maintain their existing allocations to primary funds over the next year, leading to an overall RLI score of 63, down slightly from 65 in H1 2018.

Adam Turtle, partner and co-founder at Rede Partners, said, “While the UK is currently gripped by Brexit uncertainty, which seems to be having an impact on UK investors, the RLI demonstrates private equity’s reputation as an increasingly attractive asset class for institutional investors.

“As economic uncertainty rumbles on, many investors continue to be encouraged by private equity’s resilience and ability to ride out short term volatility. It’s unsurprising to see that European institutional investors are reasserting their vote of confidence, planning on upping commitments to the asset class over the next 12 months.”

“The private equity industry has become used to record capital inflows from investors over recent years.

“Although we are still in a period of growth, if allocations begin to slow down it will be essential for private equity managers to prove they are able to add real value and deliver something unique that differentiates them from the herd if they are to remain competitive in months to come.”

After 2017 was dominated by existing manager re-ups, much of the anticipated growth in private equity deployment is now likely to be driven by institutional investors exploring new relationships, replacing existing investee platforms with new managers, Rede said.

The overall RLI score for deployment to existing relationships fell three points to 58 for H2 2018, while the figure for new relationships increased by a single point to 66.

North American LPs experienced the largest swing in sentiment towards new and existing relationships, with investors in the region giving an RLI score of 55 for existing relationships – down seven since H1 2018, while appetite for new relationships ticked up four points to 66.

Scott Church, partner and co-founder at Rede Partners, added, “North American LPs are preparing to branch out and explore new relationships over the coming year, which is a very positive sign of confidence in the market alongside bullish sentiment towards both allocations and distribution expectations from investors in the region.”

Co-investments remain a key area of focus for LPs over the next 12 months, as 93 per cent of RLI respondents plan on increasing investment or keeping allocations to the strategy the same.

Both Europe and North America remain bullish about co-investments, scoring 70 and 68 respectively.

While most types of investors remain bullish, the score registered by the insurance sector fell by 13 points to 56, representing the most bearish investor category when it comes to co-investments. That is compared to high levels of confidence from fund of funds, which scored an RLI score of 81.

With a score of 44, the RLI is relatively unchanged compared with the last two editions of the Index.

This follows a record year in 2017 with $38bn raised for secondaries funds, up 33 per cent from 2016, which was also a record year at $29bn raised.

However, while the overall RLI score for secondaries remains under 50, investors are slightly more bullish towards the asset class than they were at the beginning of 2018, Rede Partners said.

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