Private equity investors are divided on whether they expect fund terms and conditions to continue to improve or remain about the same, according to Coller Capital's 20th Global Private Equity Barometer, reflecting the results of a biannual survey.
Some 115 private equity worldwide investors responded to the survey conducted in February and March by Arbor Square Associates, an alternative investment research firm.
Some 44% of limited partners surveyed expect more favorable terms in the next two years, while 44% consider the balance of power between limited partners and general partners to be at equilibrium.
At the same time, private equity investors are willing to trade certain fund terms for others. About half of the private equity investors worldwide and 60% of North American investors would accept lower hurdle rates — a minimum return a fund must achieve before the general partner can take its share of the profits — in exchange for lower management fees.
Investors will identify the terms that matter most to them, said Sebastien Burdel, partner in the New York office of private equity secondary market money manager Coller Capital.
“Fees have been at the core of what matters to the (limited partner) because they are certain in nature, are the most immediate drag to performance in the early years of an investment … and there's a belief that for a certain size of fund and institution … fees become a meaningful source of wealth creation for the manager,” Mr. Burdel said.
Sixty-five percent of survey respondents indicated they think there is too much debt in North America for deals, which is driving down future returns. This is up from 20% of respondents who thought so in 2012. At the same time, the percentage of respondents in the U.S. that indicated companies are being funded at the appropriate levels dropped to 31% from 72%. In Europe, 22% of respondents thought there was an oversupply of debt, up from 2% in 2012, And in Asia-Pacific, 15% of respondents stated there is an oversupply of debt, up from 6%.
Meanwhile 57% of respondents indicated that companies in Europe were funded appropriately, up from 46% two years ago, while 65% of respondents indicated that companies in Asia-Pacific region are funded at appropriate levels from 72%.
“We certainly see the credit markets are the most buoyant in the U.S. where CLOs (collateralized loan obligations) have come roaring back and high yield has come back roaring and reached an all-time high in the recent past,” Mr. Burdel said. “That's not a phenomenon available at present in the rest of the world.”
What's more, few private equity investors expect to reinvest with existing private equity managers. A greater percentage of investors will now commit capital to first-time funds.
Eighty-four percent of survey respondents will decline to reinvest with existing private equity fund managers over the next two years, the Coller Capital survey found. However, 70% of North American investors, 58% of European investors and 53% of limited partners based in Asia-Pacific will invest in a private equity manager's first fund.
“We don't have stats from two or three years ago, but anecdotally that is a significant change from a couple of years ago,” Mr. Burdel said.