Tough times ahead for public pension, insurance investors

 

By Babu Das Augustine       A significant number of institutional investors expect to miss their investment targets under the existing economic and political environment, accorting to Coller Capital’s latest Global Private Equity Barometer, a survey of the world’s leading private equity investors.

One third of large institutional investors such as public pension plans and insurance companies believe their organisations will miss their overall investment target returns in the next 3-5 years.

This 25th edition of the Global Private Equity Barometer captures the views of 110 private equity investors from around the world. The Barometer’s findings are globally representative of limited partner (LPs) who lead organisations investing in venture capital funds, private equity, family offices, private investors.

The survey results showed that 36 per cent of insurance company LPs and 31 per cent of public pension fund LPs believe their organisations will miss their overall (rather than private equity) investment return targets in the next 3-5 years, unless there is significant change in their economic environment and/or operating model.

LPs expect their returns from private equity to remain strong, with over three quarters of LPs forecasting net annual returns of 11 per cent or more from the asset class over the next five years.

Investors are optimistic about the medium-term outlook for their private equity portfolios, with 77 per cent of LPs forecasting net annual returns of over 11 per cent, and around a fifth of LPs forecasting net annual returns of over 16 per cent. Their expectations for venture capital returns from North America, Europe and Asia-Pacific have all improved.

The study also showed investors’ hunger for alternative assets shows no signs of abating. Almost half of the world’s LPs say their organisations will grow their target allocations to infrastructure in the next 12 months. Almost 40 per cent of LPs will embrace increased target allocations to private equity and real estate.

Overall, the appetite for hedge funds is seen receding with over a quarter of LPs planning to reduce their target allocations this class of investments in the next 12 months, compared with just 8 per cent of LPs planning an increase. The picture is even clearer over the longer term — 39 per cent of LPs say they will reduce or stop hedge fund investing in the next 3-5 years.

Private equity investment in real assets is increasingly popular — with around half of LPs already invested in private equity real estate and private equity infrastructure, and another one in ten LPs planning exposure of this kind in the next three years.

“Faced with ever-growing liabilities, high levels of volatility, and a low-return world, many insurers and pension plans are finding it hard to make ends meet. They do have one great advantage, however: long-term investment horizons. Making full use of the illiquidity premium offered by alternative investments is one good way of closing the gap.” said Jeremy Coller, chief investment officer (CIO) of Coller Capital.

The survey results showed that increasing political considerations are impinging on economic prospects and investment returns. Two thirds of LPs say there would be a negative impact on the EU from a ‘hard’ Brexit — a decisive separation of the UK from the EU involving significant restrictions on the UK’s access to the EU single market and strong immigration curbs.

Three quarters of LPs think a hard Brexit would damage the UK. Well over a third (37 per cent) of LPs think a hard Brexit would also lower their overall returns from European private equity.

Race for co-investments

The majority of investors take a negative view of LPs acquiring stakes in general partner (GP) management companies, believing that this creates potential conflicts of interest and misalignment. The feeling is strongest among European LPs, 80 per cent of whom hold this view.

Investors recognise that LP demand for co-investments is likely to outstrip supply. Almost two thirds of LPs expect fees and carried interest to be payable on more co-investment opportunities in the future. Despite this, almost all the investors that are planning to increase the size of their in-house private equity teams in the next two years (around 40 per cent of all LPs) will ask their new staff to focus on co-investments and direct private equity investing.

Private equity investors have mixed views on fund restructurings by their GPs, but where these do happen, LPs believe they generally make the right decisions on whether to exit or remain invested in the funds. Over three quarters of LPs said that, with hindsight, they believed they had usually made the right decision.

Institutional investors have mixed views on corporate entrants to the venture capital market — with just over half of LPs seeing corporate venturers as unhelpful competition for financial investors such as them. However, almost as many LPs see corporate venturing as a positive development, on the grounds that it boosts the whole venture ‘ecosystem’.

Emerging PE markets

Within emerging private equity markets, India and south-east Asia are seen as offering the most attractive opportunities in the Asia-Pacific region over the next three years, with one third of LPs identifying these areas as likely to offer attractive opportunities for private equity.

Within Latin America, one third of LPs identify Brazil and Mexico as offering particularly attractive opportunities for private equity in the same period. However, LP views on Brazil are mixed: around a quarter of LPs cite Brazil and Argentina as being less attractive for private equity investing within this timescale.