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Preqin Private Equity Investor Survey Oct2010

Preqin Private Equity Investor Survey Oct2010

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Published by: http://besthedgefund.blogspot.com on Dec 04, 2010
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Private Equity Investor Survey
October 2010Preqin Research Report
Preqin Research Report© 2010 Preqin Ltd. www.preqin.com
Private Equity Investor Survey
Preqin Special Report: Private Equity Investor Survey
nancial crisis has clearly had a signi
cant impact onprivate equity fundraising over the past 18 months. Privateequity funds that reached a
nal close during 2009 secured$286 billion in capital commitments, a far cry from the $653billion secured by the funds that closed the year before. Investorcon
dence in private equity also suffered as fund valuations fellduring 2009 and the lack of deal
ow in the industry left manyinvestors over-committed to the asset class with a shortage ofcapital for new investments.Despite increasing fund valuations and evidence of improvinginvestor appetite for private equity seen towards the end of2009, fundraising in early 2010 still fell below levels seen theprevious year: in H1 2010, 242 funds closed having raised $116billion, compared to the 336 funds which closed in H1 2009having raised $171 billion. Furthermore, our December 2009LP survey showed that the proportion of investors seeking toreduce their private equity allocations over the coming yearhad reached a considerable 13%, though perhaps this was are
ection of the fact that many LPs found themselves over-allocated to the asset class at this time. But how are LPsviewing the asset class now?We surveyed a representative sample of over 100 institutionalinvestors of a wide variety of types, including insurancecompanies, sovereign wealth funds, public and private sectorpension funds and family of
ces, located across the globe inorder to obtain an insight into their current views on the assetclass, their appetite for different areas of the private equitymarket at present and their plans for the future.
Allocations to Private Equity
nancial crisis left many investors over-allocated toprivate equity as a result of falling public equities valuationsand delays in revaluing private equity holdings. Many LPswere consequently prevented from making new commitmentsto private equity funds. 21% of respondents to a survey ofinstitutional investors carried out in December 2008 wereexceeding their target allocations to private equity.We asked respondents to our June 2010 survey whether theywere at, below or above their targeted level of exposure tothe asset class. As shown in Fig. 1, a considerable 54% ofrespondents informed us that they were below their targetallocations. Just 6% of respondents were exceeding their long-term target allocations to private equity.
Return Expectations
The amount by which investors expect their private equityportfolios to outperform public market investments has onaverage increased over the past couple of years, as shownin Fig. 2. In December 2007, when LPs were asked howthey expected their private equity investments to perform,17% thought they should provide returns of more than fourpercentage points over public markets. In December 2008, thishad risen to 42% of LPs, and in December 2009, 52% expectedreturns of in excess of four percentage points over publicmarkets. Little has changed in the past six months: in June2010, 53% of survey participants expected their portfolios tooutperform public markets by more than four percentage points.
54%58%53%40%33%47%6%8%0%0%10%20%30%40%50%60%70%GlobalNorthAmericaEuropeBelow TargetAllocationAt TargetAllocationAbove TargetAllocation
Source: Preqin
Fig. 1: Proportion of Investors Currently At, Above or Below Their Target Allocations to Private Equity
   P  r  o  p  o  r   t   i  o  n  o   f   R  e  s  p  o  n   d  e  n   t  s
Investor Location
0%10%20%30%40%50%60%Same asPublicMarketPublicMarket+2%PublicMarket+2.1 to+4%PublicMarket+4.1% andOverDec-07Dec-08Dec-09Jun-10
Source: Preqin
Fig. 2: Investors’ Return Expectations for Their Private EquityPortfolios
   P  r  o  p  o  r   t   i  o  n  o   f   R  e  s  p  o  n   d  e  n   t  s
Expected Private Equity Returns
Preqin Research Report© 2010 Preqin Ltd. www.preqin.com
Private Equity Investor Survey
Preqin Special Report: Private Equity Investor Survey
The private equity industry entered a more challenging periodwith the onset of the
nancial crisis, with fund valuations fallingand a dif
cult exit environment leading to a drop in distributionsfrom funds. Although some recovery has been seen in theperformance of private equity funds, investors’ views of theasset class were affected. Whereas in December 2007 just 2%of LPs were dissatis
ed with the returns they received from theirprivate equity investments, in June 2010, 21% felt that theirprivate equity investments had fallen short of their expectations,though as we have seen, their return expectations haveincreased in comparison to public markets during this period.The majority of LPs, however, feel that the returns they arereceiving from their private equity investments have met theirexpectations. A well-known Asian investor told us, “Overall, ourprivate equity investments have met our expectations; since the
nancial crisis, our funds have under-performed but before thecrisis they out-performed so overall it has been alright.” 
Secondary Market and Direct Investments
Some of the more experienced private equity investors, and/orthose with greater resources at their disposal, have started todivert an increasing proportion of capital that previously wouldhave been used for fund commitments to direct investmentsin private companies instead. Our recent survey found that38% of investors set aside a proportion of their private equityportfolios for direct investments, either on a proprietary basisor as co-investments alongside GPs in their portfolios in selecttransactions.Of these LPs, 61%, or 23% of those polled overall, investdirectly in private companies on a proprietary basis. For someof these investors, such investments have always formed partof their strategies; however, for others, direct investments arebecoming a core part of their overall private equity investmentstrategies. Alberta Investment Management Corporation(AIMCo), for example, has decided to make more direct andco-investments going forwards but will still seek to make fundinvestments in sectors and regions in which it does not makedirect investments, such as vehicles targeting distressedopportunities or Asia.Of the LPs that invest directly, 76% (or 29% of all LPs polledin the survey) seek to make co-investments alongside GPs.Saplings Alternative Advisors, a hybrid fund of funds manager,engages in co-investments to enhance returns, produce earlierliquidity and to mitigate the double layer of fees faced by itsclients.Such investments are on the rise: a considerable 61% of surveyparticipants that have an allocation to direct private equityinvestments intend to increase the level of their activity in directinvestments during 2011 compared to 2010, as shown in Fig. 4.(This chart shows only the intentions of investors that are activein the secondary market and/or invest directly in companies.)Just over a quarter (26%) of investors that make directinvestments in companies, however, are looking to decreasetheir activity in this area in 2011 in comparison to 2010.The private equity secondary market is also continuing to attracta signi
cant degree of attention from investors that are seekingto purchase stakes in funds. As Fig. 4 shows, almost a thirdof institutional investors (32%) that are active as purchasersof fund interests on the secondary market are intending toincrease their activity in this area in 2011 in comparison to 2010,and a further 45% intend to maintain the level of their activity.
24%74%2%9%70%22%0%10%20%30%40%50%60%70%80%ExceededExpectationsMetExpectationsFallen ShortofExpectationsDec-07Jun-10
Source: Preqin
Fig. 3: Have Investors’ Private Equity Fund Investments Lived upto Expectations?
   P  r  o  p  o  r   t   i  o  n  o   f   R  e  s  p  o  n   d  e  n   t  s
32%61%45%13%23%26%0%10%20%30%40%50%60%70%80%90%100%Secondary MarketPurchasesDirect Investmentsin CompaniesDecreaseAllocationMaintainAllocationIncreaseAllocation
Source: Preqin
Fig. 4: Investors’ Expectations of the Level of Both SecondaryMarket and Direct Investment Activity in 2011 Compared to 2010
   P  r  o  p  o  r   t   i  o  n  o   f   R  e  s  p  o  n   d  e  n   t  s   A  c   t   i  v  e   i  n   E  a  c   h   A  r  e  a

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