Broad sunlit uplands?

Both GPs and LPs are now returning to the fray, and the asset class, with new commitment, having had an unexpectedly good Crisis and seen their industry stand the test of exogenous shocks quite outside the usual range of economists' forecasts. As Silver Lake's Glenn Hutchins said at the Forum, "this is something I never thought I would see in my lifetime." But private equity seems to have survived not only this shock, but also the knock-on regulatory effects in the US and EU that threatened to permanently impede its basic processes. The ILPA guidelines, meanwhile, seem to have institutionalized better practice in fund terms and GP/LP relations while leaving many of the customary practices of the discipline intact – possibly signs that they weren't that onerous in the first place.

Even statistically, private equity is looking very credible for LPs. The Canada Pension Plan Investment Board, still trailing CalPERS in terms of overall size but fast catching up, and seen by many of its institutional peers as the LP to emulate, recently saw its private equity assets, which now make up 14.6% of its portfolio, rise to a value of some C$20.3 billion ($20.1 billion) as of end September 2010, up from the C$17 billion ($16.8 billion) and 13.1% it recorded at end June 2010, in an overall portfolio of C$138.6 billion ($137.3 billion). And the comparisons with end March's C$16.1 billion ($15.9 billion) and 12.5% look even better. That is a very different story from the experience of the university endowments and some pension funds in 2008-09. Private equity really is performing well out of the Crisis, it seems, and delivering to its savvier investors.

With all this optimism, what could still go wrong? Well, for one thing, the capital overhang in the industry has not gone away. That is the other great wall of money to set alongside the institutional capital supposedly ready to go into Asia. It may get smoothly discharged in deals facilitated by a somewhat better economic environment, even if many of those may be secondary deals. Who knows, some of it might even get returned to LPs? But that, as much as the broader economic climate, is likely to influence the industry for years to come.

There is also the small but distinct possibility that all this optimism might go to GPs' heads. For instance, CPPIB's performance over 2010 may be good and improving, but much of its uptick during the year was due to an especially strong September for US equities, which still represent more than 53% of its portfolio. Private equity is still a relatively small slice of the asset allocation pie, and for indications of what this can mean for the industry, look at the secondaries sub-asset class, which is about to see unprecedented volumes as banks release their PE holdings and spin off their internal PE groups under the pressure of the Volcker Rule and Basel III. Relatively small shifts in the bigger picture can have disproportionate effects on this still-alternative asset.

And if hubris does by some miracle take hold in Asian PE, some might find their own silver lining in it. Oaktree's Howard Marks, with a different take on the opportunities surrounding private equity, pointed out at the Forum that, "Asia needs a good healthy visit from the PE industry to do some imprudent deals. And when they go bad, there'll be the opportunity for the distressed debt investors. But Asia hasn't had that yet." Surely, after the Crisis, that could never happen …

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• Topics
• Regulation
• LPs
• Performance
• Oaktree Capital