Some 39% of investors expect to increase their private equity allocations, while 41% expect less in distributions and lower returns, according to Coller Capital's Winter Barometer, the latest of the alternative investment manager's semiannual surveys.
“One thing seemed anomalous; (limited partners) are saying they are still supportive of alternatives on the one hand. On the other hand, there is concern about European private equity returns given Brexit and … they expect distributions to slow,” said Frank Morgan, partner and president of Coller Capital-U.S. in an interview.
Some 41% of private equity limited partner respondents expect distributions to slow over the next 24 months and 29% expect an improvement. The remainder do not expect a change in distributions.
Meanwhile, only 1% of investors expect annual returns of 20% or more for the next three to five years; 20% expect returns of 16% to 20%; 56% expect 11% to 15%; and 23% expect returns of 10% or less. This is compares to last year's Winter Barometer, in which 3% of respondents expected more than 20% returns, 20% expected 16% to 20%, 63% expected 11% to 15%, and 14% expected returns of 10% or less.
More than a third of investors (37%) believe their European private equity returns would suffer as a result of a “hard Brexit,” defined as a decisive separation of the U.K. from the European Union, involving significant restrictions on the U.K.'s access to the EU's single market and strong immigration curbs. Some 6% expect a hard Brexit would have a positive effect, with the remainder expecting no change.
By comparison, 33% of limited partners indicated that the U.K decision to exit the EU would negatively impact the long-term performance of their European private equity portfolios, regardless of a hard Brexit, the Winter 2015 Barometer revealed. Only 6% expected a positive effect.
“If you think returns are coming down and distributions will slow, but are still going to increase your allocation to the asset class and exposure to it notwithstanding the possibility of lower returns, it's still an attractive place to invest,” Mr. Morgan said.
Among the alternative investment asset classes, more investors indicated they planned to increase their target allocations to infrastructure over the next 12 months than any other alternative investment asset class. Forty-seven percent of limited partners expect to increase their allocations to infrastructure and 4% are planning a decrease. By comparison, 39% plan to increase their private equity allocations with 8% a decrease. Thirty-eight percent expect to increase their real estate target allocations, with 5% planning a decrease.
Hedge funds were the only laggard, with 8% expecting to increase their hedge fund target allocations and 27% anticipating a decrease.
“Infrastructure is viewed as a good risk-return asset in a world where fixed-income returns are quite small,” Mr. Morgan said.
In last winter's survey, 46% of investors expected to increase their infrastructure target allocations in 12 months, 37% expected to boost private equity, 34% planned a real estate target allocation increase and 19% anticipated increasing their hedge fund allocations.
Five percent of investors polled last year expected to decrease their infrastructure allocations, 10% expected to cut private equity target allocations, 8% planned to drop real estate allocations and 16%, hedge funds.
Comparison data is limited because few questions are asked the same way in each barometer survey.
Coller Capital executives surveyed 110 private equity investors in September and October.