Coller Capital: Investors expect strong years for PE in 2023 and 2024
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.