Evening Brief – 12.18.23
LPs Think GPs are Overly Optimistic
Most Limited Partners (LPs) believe that General Partners’ (GPs) expectations for returns in the current economic environment are overly optimistic, and they are directing private equity companies to “stick to what they know” while attempting to commit their shelved cash reserves.
Three-quarters of LPs polled for the bi-annual Coller Capital Global Private Equity Barometer believe GPs are overly confident about returns, while only 1% believe GPs are underestimating returns.
Approximately 60% of LPs anticipate annual net returns of 11% to 15% across their PE portfolio over the next three to five years, with buyout strategies capable of delivering higher overall returns.
According to the survey of 110 global alternative asset investors, 66% are hesitant to allow their GPs to bend their investment strategy given present market conditions.
This is despite growing prospects in alternative assets outside of the core staples of PE, VC, and growth capital, with many investors increasingly looking to rising sectors such as infrastructure and private debt for consistent returns.
Approximately 44% of LPs expect to increase their target allocations to private credit over the next 12 months, the highest growth of any strategy.
“Anticipation of higher for longer interest rates, continued expectations for diminished near-term bank lending, and unfavorable economic dynamics will likely continue to provide conditions for private credit to remain an attractive opportunity, Coller said, as a broader set of investors gain experience and exposure to it.”
Nearly 50% of LPs said the current interest rate environment has positively impacted the performance of their private credit portfolio; however, the consequences of higher interest rates on their private credit portfolios have yet to manifest for 36% of respondents.
Over the next few years, three-quarters of LPs believe private credit managers will lend to private equity quicker than banks, while only 5% believe banks will outrun private credit managers.
Jeremy Coller, founder and CIO of Coller Capital, said, “The latest edition of the Global Private Equity Barometer shows that despite a disruptive macro environment, alternatives remain an attractive asset class. “LPs are committed to maintaining their allocation and expanding their portfolios in areas such as private credit and co-investments.
“But fundamentals in the market are shifting – the opportunities offered by generative AI and the challenges of an evolving regulatory landscape have the potential to change the way both LPs and GPs operate in the future.”
Most LPs (54%) see the importance of developing in-house AI capabilities to improve organizational capability and decision making. The most important areas for AI integration are fund monitoring and competition benchmarking, with 38% and 31% of investors wanting to incorporate AI in these operations, respectively.