Coller Barometer shows slumping returns, soaring Asia

Concurrently, LPs – especially those from Europe – are also looking to up their commitments substantially in Asia Pacific. With some LPs newer to the asset class now leaving it altogether, others may be simply transferring expectations to Asia.

Fewer happy returns?

The Barometer’s data on lifetime private equity returns provides worrying proof that LPs are seeing, and coming to expect, lower overall comeback from the asset class. Over 51% of LPs in the poll reported lifetime returns of 10% or less from their portfolios, compared to 22% in 2008 and 29% in 2009. And the proportion of LPs seeing returns of 16%+ from their commitments is now down to 22%, compared with 45% in 2007.

Figures like this call into question the entire investment rationale for the asset class. As Hiro Mizuno, Partner at Coller Capital pointed out, “If this kind of return becomes common for private equity, it will lose its attractiveness...We hope that this is a temporary dip because of the financial crisis, but some people may believe that the return levels now will be very different from in previous decades.”

Mizuno notes that lifetime returns figures are skewed toward recent returns, primarily because even the longest-established investors in private equity increased their commitment levels over the past five years or so. Big buyout funds in particular tended both to drive up LP private equity commitments during the boom years and drive down their returns as keenly-priced deals turned sour.

As a result, “a lot of investors have left this asset class. Quite a few have told us that they just stopped investing in private equity,” Mizuno said. This chiefly refers to recent entrants to private equity, many of them outside the latest poll, many of which ramped up programs during or just before the bubble period that ended in 2008. LPs with decades-long commitment to the asset class will remain investors, but may reduce overall commitments.

Asia Pacific attractive

While the global picture looks relatively gloomy, LPs are preparing to rebalance their allocations with both eyes on Asia, looking at both growth capital and buyout strategies.

According to the Coller survey, the16% of respondents who have more than 10% of their private equity allocation in Asia Pacific today will more than double to 38% within three years. North American investors, already well exposed to the region with 26% allocating more than 10% to the region currently, will see this figure rise to 41% in the same period. And European LPs, less exposed to Asia, will increase allocations to just below North American levels.

The LP poll unsurprisingly rates China and India as the first and second most attractive growth capital markets, naming Australia as the most attractive buyout market. China also tops the list of overall country preferences, with 53% of the poll intending to expand or begin investment there in the next two years, while 44% plan the same for India.

The issue is then whether Asia, especially China and India, can deliver. “Australia is the only market which has a track record of [consistently high returns],” Mizuno cautioned.But he maintained that, “China and India still create huge wealth opportunities. From a macro perspective, those countries seem to create higher returns.”

Above all, he emphasized, returns in the 16%+ range are what LP investors need to sustain their commitment to private equity above other asset classes. These should be achievable by reasonably experienced private equity professionals, in emerging Asia as elsewhere, with or without the leverage levels of the pre-GFC boom years.

Returns expectations of that type practically dictate Asia as the investment destination of choice. “If you want that kind of return over the next few years, it’s very difficult to say the US or Europe, so you have to say Asia,” Mizuno concluded. “People cannot really have high hopes or even reasonable expectations of the US or European markets at the moment.” 

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• Topics
• Performance
• Funds
• LPs
• Coller Capital
• Hiromichi Mizuno