London — The majo­rity of insti­tu­tio­nal inves­tors (limi­ted part­ners, LPs) are posi­tive about the pros­pects for private equity in North America and Europe in 2023 and 2024 and expect them to be strong vinta­ges, accor­ding to Coller Capital’s latest Global Private Equity Baro­me­ter. When it comes to the outlook for private equity in the Asia-Paci­­fic region, inves­tors’ opini­ons tend to be balanced.

For private equity, most inves­tors believe that the health­care and phar­maceu­ti­cal sectors will offer attrac­tive invest­ment oppor­tu­ni­ties over the next two years. Three-quar­­ters say the same about IT and busi­ness services. There are clear diffe­ren­ces on energy, where more LPs favor rene­wa­ble energy than fossil hydrocarbons.

In terms of invest­ment stra­te­gies, the majo­rity of inves­tors see good oppor­tu­ni­ties in the next two years for mid-market and special situa­tions funds. Three-quar­­ters of LPs also expect good oppor­tu­ni­ties in secon­dary market invest­ments, seeing an incre­asing number of insti­tu­tio­nal inves­tors using this market to reba­lance their port­fo­lios. Fewer LPs see oppor­tu­ni­ties with fund mana­gers (gene­ral part­ners, GPs) for large and mega buyouts — a signi­fi­cant change from their opinion five years ago. Inves­tors are also concer­ned about the amount of debt invol­ved in buyout deals. Half think the current percen­tage is too high.

“Inves­tor appe­tite for private credit funds shows no signs of abating,” said Michael Schad, part­ner and head of Coller Credit Secon­da­ries. “In that regard, it’s inte­res­t­ing to see that they expect to see a grea­ter concen­tra­tion of capi­tal on larger fund mana­gers in private debt over the next few years.”

Inves­tor beha­vior during due dili­gence and travel

Over the past two years, inves­tors have increased their audit effort, with this apply­ing to a higher propor­tion among Euro­pean LPs than among those from North America and Asia Paci­fic. Due dili­gence for fund expo­sures is a major reason why LP travel has retur­ned to levels not seen since the begin­ning of the pande­mic. Inves­tors are also likely to return to trave­ling to confe­ren­ces and annual gene­ral meetings, although a rather small number of them plan to return to their previous busi­ness travel patterns. In the invest­ment process itself, three-fifths of inves­tors see nego­tia­ting terms as a chall­enge, but fewer see evalua­ting mana­gers or acces­sing funds as a chall­enge. They differ in their assess­ment of the importance of incen­ti­ves for a first degree.

Importance of Arti­fi­cial Intel­li­gence for Private Equity

Inves­tors are open to the bene­fits of arti­fi­cial intel­li­gence (AI) for the private equity tran­sac­tion process. Three-quar­­ters of LPs believe it could be a useful tool for initia­ting tran­sac­tions. Three-fifths of LPs believe it could be useful for deal evalua­tion or post-tran­­sac­­tion enga­ge­ment with port­fo­lio companies.

Anti-ESG move­ment in the USA

The importance of envi­ron­men­tal, social and gover­nance (ESG) stan­dards in private equity conti­nues to be taken seriously by insti­tu­tio­nal inves­tors, despite the “anti-ESG move­ment” emana­ting from Repu­bli­can gover­nors in the US. Three-quar­­ters of LPs do not expect this to impact the importance that fund mana­gers place on ESG. Euro­pean LPs are ahead of their global peers when it comes to estab­li­shing ESG teams in their compa­nies: three-quar­­ters of Euro­pean LPs have alre­ady hired their own ESG staff. The reverse is true for North Ameri­can LPs, with the same percen­tage indi­ca­ting they have no plans to hire specia­li­zed ESG staff.

Perfor­mance of buy-and-build portfolios

Across all private equity port­fo­lios, LPs are posting record returns, with two-fifths gene­ra­ting annual net returns of 16 percent or more over the life of the port­fo­lios. Perfor­mance differs by stra­tegy, parti­cu­larly between buy-and-build invest­ments and those more focu­sed on orga­nic growth. Two-thirds of LPs repor­ted that their buy-and-build port­fo­lios outper­for­med. Inves­tors also provi­ded infor­ma­tion on where they think the best invest­ment oppor­tu­ni­ties for private equity will come from: About three-fifths of LPs said that invest­ments in family and start-up busi­nesses, as well as company sales and spin-offs, will provide the best oppor­tu­ni­ties over the next two years.

Chan­ges in the private markets

Two-fifths of inves­tors plan to increase their target allo­ca­tion to private credit and infra­struc­ture in the next year. In the private debt markets, two-thirds of LPs expect grea­ter concen­tra­tion of capi­tal among larger GPs over the next three to five years. For private equity, fewer LPs expect to increase their average expo­sure to indi­vi­dual GPs than when we surveyed them five years ago. Howe­ver, LPs are making room for new mana­gers in their port­fo­lios, with the majo­rity making a commit­ment to a new private equity mana­ger and more than half adding new private credit and venture capi­tal managers.

Capi­tal calls and venture capi­tal down rounds

Some LPs are cautious about the expec­ted level of funds drawn down by their GPs over the next two years compared to the last two years, with two-fifths of them expec­ting less capi­tal to be drawn down. Caution also prevails with regard to their venture capi­tal port­fo­lios: Three quar­ters expect more down rounds in their port­fo­lios here due to falling valuations.

Coller Capital’s Global Private Equity Baro­me­ter is a unique snapshot of global private equity trends. Twice a year, it provi­des an over­view of the plans and opini­ons of insti­tu­tio­nal inves­tors in this asset class in North America, Europe and the Asia-Paci­­fic region (inclu­ding the Middle East). It has been published semi-annu­ally in summer and winter since 2004.

The latest baro­me­ter reflects the views of 110 insti­tu­tio­nal private equity inves­tors world­wide, surveyed from Febru­ary 13 to March 31, 2023. The results are globally repre­sen­ta­tive of all LPs in terms of inves­tor loca­tion, type of inves­t­ing orga­niza­tion, total assets under manage­ment and length of expe­ri­ence with private equity investments.

About Coller Capital

Coller Capi­tal, foun­ded in 1990, is one of the world’s leading inves­tors in the secon­dary market for private asset clas­ses and is conside­red an inno­va­tor in complex secon­dary market transactions.

The company provi­des liqui­dity solu­ti­ons to private market inves­tors world­wide, acqui­ring invest­ments in private equity, private credit and other private market assets. Head­quar­te­red in London with offices in New York, Hong Kong, Beijing and Seoul, Coller’s multi­na­tio­nal invest­ment team has a global reach.

In Janu­ary 2021, the company placed the “Coller Inter­na­tio­nal Part­ners VIII” fund with capi­tal commit­ments (inclu­ding co-inves­t­­ments) of just over $9 billion from more than 200 of the world’s leading insti­tu­tio­nal inves­tors. — In Febru­ary 2022, the firm placed the Coller Credit Oppor­tu­ni­ties I fund with $1.45 billion in capi­tal commit­ments (inclu­ding co-inves­t­­ments) from more than 40 insti­tu­tio­nal investors.

In March 2023, Coller Capi­tal announ­ced the crea­tion of a global Private Wealth Secon­da­ries Solu­ti­ons (PWSS) busi­ness to provide high net worth indi­vi­du­als with expan­ded access to private capi­tal markets.