Private-equity investors to fire managers, warns Coller

Half of the world's limited partners (ie institutional investors in private equity) now say their lifetime portfolio return from the asset class has been less than 11%, according to Coller Capital, a London-based specialist in secondary private equity.

Another 6% reported negative returns, while the portion of LPs enjoying lifetime returns of more than 16% has declined from around 37% a year ago to 22% as of summer 2010.

Coller surveys global LPs twice a year. This survey, which included 110 LPs from around the world, finds the number of investors with such low long-term returns has jumped from 22% in 2008 and 29% in 2009.

Despite the fact that private equity frequently fails to deliver the returns it has claimed, the asset class remains in favour, although a big restructuring is on the cards.

Coller finds 20% of LPs planning to increase their private-equity allocations versus only 13% saying they'll reduce it. The majority also expects the pace of new commitments to accelerate over the next 18 months.

However, LPs globally report they will cut the number of relationships they have with general partners: so say 38% of North American and 20% of European and Asia-Pacific investors.

More investors (41%) intend to increase their direct investments into private companies, rather than relying on third-party fund managers. In the short run, Coller finds LPs planning a dramatic ramp-up of Asia-Pacific exposure.

Today, only 16% of European LPs and 26% of North American LPs have more than a tenth of their exposure to Asia-Pacific. Those figures are now expected to jump to 38% and 41%, respectively, over the next three years.

LPs from Asia-Pacific are already heavily invested in the region, with 69% now reporting more than one-tenth of their allocations invested here; they too are making a big jump, however, with 87% of LPs expecting to invest more than 10% in Asia-Pacific within three years.

Australian buyout investors are seen as the most attractive destination in the region over the next two years, according to the survey, with China ranking second. China is the most desirable destination for venture and growth capital, followed by India, but Japan lags in both areas.

Coller says China and India will see the largest increase in PE investment from new and existing investors over the next two years, with 53% of LPs planning to expand or start activity in China and 44% to do so in India. This compares to 20% of LPs boosting activity in Australia, while Japan is slated to see net outflows of LP capital -- 14% of LPs plan to decrease or stop investing there versus 12% that will increase or start allocating to Japan.

Jeremy Coller, chief executive of Coller Capital, says the continued interest in private equity, despite its often poor performance, is because returns are more obviously based on skill rather than market movements. Investors continue to seek ways to diversify out of public equity markets, which have become increasingly correlated.

Although the global financial crisis harmed returns, it also taught LPs and GPs some useful lessons, which investors hope can be usefully applied.