More than half of private equity LPs are looking to make secondary deals over the next two years as investors prep for a post-Covid world, Coller Capital’s latest annual Global Private Equity Barometer shows.
Rebalancing portfolios and re-focusing on the best private equity managers are the key motivators for LPs considering tapping the secondaries market, the report said, while one third of LPs are facing liquidity shortfalls they hope to remedy through asset disposals and new credit.
The barometer said GP-led secondaries are also likely to play an important role, too. Well-structured GP-led processes are overwhelmingly popular with LPs, with 85% of regard them as a useful tool.
That data confirms insight from Eaton Partners’ Peter Martenson, who spoke to AltAssets last month advising GPs is to be proactive in their approach to portfolio management.
Coller Capital CIO Jeremy Coller said, “The secondary market played a vital role in private equity during and after the GFC, and secondary capabilities have certainly evolved since then.
“If general partners structure liquidity processes that offer genuine alignment to all parties – whether they’re buyers or sellers – limited partners will welcome them, to the benefit of all participants in the asset class.”
The Barometer said that despite the suddenness of the pandemic’s onset, nearly all LPs responding to their survey declared themselves fairly or highly satisfied with how their GPs have communicated – a stark contrast to the 2007/08 global financial crisis, after which 60% of investors told the Barometer that they were dissatisfied.
Virtual LP meetings that sprang up everywhere last spring will remain a permanent feature of the landscape, investors think – but they will become a complement to, rather than a replacement for, face-to-face meetings.
By contrast, most investors think private equity-related travel will simply never return to its pre-pandemic levels, the report said.
Two thirds of LPs believe one legacy of Covid-19 will be private equity investors starting to take more account of structural risks – and that factors such as pandemics, climate change, and geopolitics will play a more important role in investors’ asset allocation and portfolio construction decisions.
But despite continuing uncertainty about the pandemic’s ultimate effects, LPs overwhelmingly believe that the current private equity investment opportunities for GPs outweigh the risks, with just one in ten LPs thinking GPs should pause or slow their investment pace until the Covid-19 crisis is resolved.
Investor enthusiasm for private equity and alternative assets remains strong overall, although some changes in asset allocation and investment strategy are inevitable in the wake of the pandemic.
LP appetite for real estate has dipped significantly since the coronavirus struck, for example. A net balance of a quarter of LPs were planning to boost their target allocations to real estate this time last year, but the proportion of investors currently planning a lower asset allocation to real estate almost equals those planning an increase.
Many investors are also likely to re-think co-investments, the report said, with more than 40% of LPs saying changes in the investment environment are likely to lead to a reassessment of co-investment policies.
Increased attention to individual industry sectors is also on the cards, with almost half (45%) of LPs saying they will increase the sector focus of their private equity portfolios.
Unsurprisingly, LP appetite for turnaround and distressed strategies has grown – almost a third (29%) of investors are planning to increase their exposure to these strategies in the next few years (compared with one in five LPs in the Barometer of Winter 2018-19).
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