The majority of private equity investors think the growth of shadow capital will push down private equity fund returns, according to the summer edition of the Coller Capital Private Equity Barometer released Monday.
The survey of 110 global private equity limited partners from mid-March through the end of April was conducted by research firm Arbor Square Associates.
Some 64% of survey respondents indicated shadow capital — such as co-investments, direct investments and separately managed accounts — is likely to exert downward pressure on fund returns, compared with 36% of respondents who did not think shadow capital would negatively affect private equity returns.
Meanwhile, private equity investors’ top areas of concern are competition for investments among general partners, thereby decreasing returns, and the growth in size of private equity funds. Eighty-eighty percent of survey respondents included competition/decreasing returns for assets as a concern, up from 71% in the Winter 2012-2013 Barometer; 86% cited growth in fund sizes as a concern, up from 66% in Winter 2012-2013. (Coller does not ask the same questions the same way in its surveys.)
Meanwhile, 87% of investors responding to the survey said they have received annual net returns of between 11% and 15% over the lifetime of their private equity portfolios, with 20% of investors having net returns of 16% or greater since inception.
“It’s a good report card for private equity,” said Frank Morgan, partner and president of Coller Capital-U.S.
“There are worries, with too much money chasing too few deals,” Mr. Morgan said.
And the increase in shadow capital is pressuring general partners to look for larger deals to accommodate co-investments, Mr. Morgan added.
Despite their concerns, investors still plan to increase their allocations to private equity, he said.
Some 35% of limited partners plan to increase their allocations to alternative investments in the next 12 months, compared with 4% who plan to reduce their allocations; the remaining 61% will keep their allocations the same. Thirty-six percent of investors plan to increase their private equity allocations, vs. 4% that plan to decrease and 60% staying pat. Some 25% of hedge fund investors plan to decrease their allocations in the next 12 months, compared with 8% that would increase their allocations and the remainder retaining their allocations.