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Private Equity Institutional Investor
Trends for 2016 Survey
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On an ongoing basis, Probitas Partners offers research and investment
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Contents
The Private Equity Fundraising Environment ........................ 2
Private Equity Institutional Investor Survey........................... 3
Overview of Survey Findings..................................................... 3
Profile of Respondents............................................................... 4
Sectors and Geographies of Interest..................................... 10
Emerging Markets.................................................................... 22
U.S. Middle-Market Funds....................................................... 26
Venture Capital......................................................................... 28
Distressed Private Equity......................................................... 29
Credit-Focused Funds............................................................... 30
Real Asset Funds....................................................................... 31
Secondary Market..................................................................... 32
Co-Investments and Direct Investments............................... 33
Fund Structures and Key Terms.............................................. 34
Investor Fears and Concerns.................................................. 37
Our View of the Future............................................................. 40
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
1
The Private Equity Fundraising Environment
“A boom in
fourth quarter
fundraising, as
has happened in
the last two years,
could bring the
full-year total up
to 2014’s level.”
ƒƒ Fundraising in 2015 slowed significantly in the third quarter, though a boom in
fourth quarter fundraising, as has happened in the last two years, could bring the
full-year total up to 2014’s level.
ƒƒ The trends that underlie the top line numbers in Chart I:
ƒƒ Funds targeting North America make up more than 50% of all fundraising.
ƒƒ Mega buyout funds in the United States and Europe are raising large funds
that are boosting overall commitments — but most of these funds are targeting
smaller funds than they raised at the last market peak.
ƒƒ After rebounding significantly in 2014, interest in Asia has slowed so far in
2015 due to increased concerns about China.
ƒƒ The overhang of undrawn commitments has also increased over the last two
years, reaching an all-time high of $1.3 trillion.
Chart I Commitments to Global Private Equity Partnerships
500
452
450
420
400
371
367
372
USD in billions
350
300
250
200
267
241
199
193
136
150
250
229
226
148
106
100
80
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: PREQIN, does not include funds-of-funds
Private Equity Institutional Investor Trends for 2016 Survey
2
© 2015 Probitas Partners
2011
2012
2013
2014 3Q YTD
2015
Private Equity Institutional Investor Survey
Probitas Partners conducted its annual online survey in late September/early October
2015 to gauge investor interest, opinions, and perspectives on investing in private
equity. This survey is designed to track emerging trends and to compare investors’
changing views over a longer period of time. One hundred and four responses were
received from senior investment executives globally, representing such institutions
as public and corporate pension plans, funds-of-funds, insurance companies, family
offices, endowments and foundations, and consultants and advisors.
Overview of Survey Findings
The following summarizes the top-line findings from the survey:
ƒƒ Steady interest in private equity. Investors are focused on redeploying the
large amounts of capital that have been returned to them over the last three
years, though the strong pace of new commitments over this period means a
number of investors are nearing the top of their allocations.
ƒƒ . . . though one of investors’ strongest fears is that the market is nearing
the top of the cycle. This fear runs across geographies and across different
types of investors.
ƒƒ Continued focus on smaller buyout and growth capital funds. Investors
remain focused on smaller and middle-market buyout and growth capital funds in
the United States and Europe that pursue strategies where they believe managers
can deliver recurring added value.
ƒƒ . . . but many investors fear that purchase price multiples in these
sectors are too high. Even as investors express interest in the sector, they are
concerned that the high prices now being paid will drive down future returns.
ƒƒ Buyout and growth capital sector-focused funds are of interest to
investors. Though interest in the energy sector has fallen with turmoil in the
oil and gas markets, there is strong interest in healthcare and technologyfocused funds.
ƒƒ Interest in emerging markets has remained fairly steady overall.
However, certain countries, like Russia, attract little interest due to political issues
and falling oil prices, while interest in Brazil has also fallen significantly with
economic problems and political turmoil.
ƒƒ Despite the advent of Unicorns, interest in venture capital remains
muted. Interest in the sector mainly comes from North American investors
focused on U.S. venture capital; European and Asian investors remain unimpressed.
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
3
Profile of Respondents
ƒƒ There were 104 respondents to the survey; most respondents were from pension
plans, funds-of-funds, insurance companies, and family offices (Chart II).
ƒƒ Respondents were geographically diverse, with strong participation from the
United States, Europe, and Asia (Chart III).
ƒƒ As Chart IV details, more investors are near their target allocations, with less
room to back new relationships.
ƒƒ Funds-of-funds are different — allocations are not really relevant as their ability to
invest is driven by their ability to raise fund vehicles or separate accounts.
Chart II Respondents by Institution Type
I represent a:
Funds-of-Funds Manager
29%
1%
1%
3%
Consultant/Advisor
3%
17%
Insurance Company
5%
Family Office
8%
13%
10%
Public Pension
10%
Endowment/Foundation
Corporate Pension/
Private Pension Plan
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Sovereign Wealth Fund/
Government Entity
Taft-Hartley or Industry
Pension Plan
Bank
Other
Private Equity Institutional Investor Trends for 2016 Survey
4
© 2015 Probitas Partners
Chart III Respondents by Firm Headquarters
My firm is headquartered in:
47%
United States
5%
Canada
Western Europe
3%
5%
Japan
22%
8%
Asia ex-Japan
10%
Australia
Middle East
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
5
Chart IV Current and Target Private Equity Allocations
As far as our current private equity allocation, we are:
27
Roughly at our target and are looking to
maintain that level of exposure
23
Under our target allocation and actively committing
to private equity to achieve that target
17
29
16
Roughly at our target but considering
increasing the target
6
Over our target and are looking to reduce
exposure to meet that target
2
2
1
Over our target but seeking to increase the target
2
0
0
Looking to reduce our target and exit the asset class
A fund-of-funds or consultant to which
the question does not apply
33
38
4
Other
0
0
5
10
15
20
25
Percentage of Respondents (%)
2016
2015
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
6
© 2015 Probitas Partners
30
35
40
ƒƒ What drives investors to invest? Consistent with Probitas Partners’ past surveys,
all other reasons are secondary to “pursuing the best available managers and
funds,” though the focus on best managers has become increasingly important to
investors since the Global Financial Crisis (Chart V).
ƒƒ Proven, top quartile managers can be difficult to access, and since funds typically
come to market every three to five years, many investors feel compelled to commit
to these managers when they are available and open.
ƒƒ Pension plans are more likely to target funds that will provide them access to coinvestments, with 25% of them focused on this strategy.
Chart V Drivers of Sector Investment
Our sector investment focus in 2016 will be driven by (choose no more than two):
My institution simply pursues the best funds
and managers available in the market
40
A focus on those private equity sectors I believe
will outperform others in this vintage year
16
Maintaining established relationships with fund
managers returning to market this year
14
Targeting funds that will provide
access to co-investments
11
The strategies that my clients
have directed us to pursue
10
My need to deploy significant amounts
of capital allocated to private equity
5
My institution’s need to diversify
its private equity portfolio
4
My need to decrease exposure
to private equity
0
Other
2
0
10
20
30
40
50
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
7
ƒƒ More respondents are looking to increase commitments as 2016 approaches,
continuing the allocation rebound after the bottom of the fundraising market in
2009 (Chart VI).
“There is a strong
focus...on re-ups
with a limited look
at developing new
general partner
relationships.”
ƒƒ There is a strong focus this year (as there has been in the past) on re-ups with a
limited look at developing new general partner relationships (Chart VII).
ƒƒ Based on our discussions with investors, many are continuing to triage their
relationships, looking to upgrade their portfolio quality by not re-upping with fund
managers that had weak returns over the last cycle and putting more money to
work with fewer selected managers.
ƒƒ Only 3% of respondents targeted separate accounts as their primary means of
investing in private equity.
Chart VI Private Equity Allocations
For 2016, we or the clients we advise are looking to commit across all areas of private equity (in USD):
Percentage of Respondents (%)
25
20
20
0
15
19
14
10
9
10
21
20
14
15
5
23
22
11
2
0
Other
<$50 MM
$50 MM–
$150 MM
$150 MM–
$250 MM
2016
$250 MM–
$500 MM
2015
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
8
© 2015 Probitas Partners
$500 MM–
$1 B
>$1 B
Chart VII Manager Relationships
During 2016, we would expect our primary focus to be:
Evaluating re-ups with current general partner relationships
with a limited look at new relationships
54
63
27
26
Actively pursuing relationships with new managers
7
Evaluating re-ups with current
general partner relationships
4
Evaluating re-ups with current general partner
relationships, looking to decrease the
number of relationships significantly
6
2
3
Pursuing separate accounts with
a smaller number of managers
2
0
0
Our 2016 commitments have already
been completely allocated
3
3
Other
0
10
20
30
40
50
60
70
Percentage of Respondents (%)
2016
2015
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
9
Sectors and Geographies of Interest
Chart VIII details the sectors of interest to investors for 2016:
ƒƒ Middle-market buyouts and growth capital in the United States and Europe
dominate interest, as has been the case in most of our previous surveys.
ƒƒ Interest in distressed debt increased from 20% in 2014 to 31% this year.
ƒƒ Interest in energy-focused funds declined from 31% last year to 20% this year in
the midst of market turbulence in the sector.
Table I compares the top-ranked areas of interest from our 2007 survey (the one
immediately before the Global Financial Crisis) and the current survey.
ƒƒ The latest survey contained more options than 2007 but U.S. middle-buyout funds
still lead.
ƒƒ U.S. venture capital ranked third in 2007 and only eighth in 2016, though that
ranking is actually a significant rebound from fifteenth place in 2014. Among
North American investors, venture capital in 2016 ranked fourth, with 47%
targeting it.
ƒƒ Distressed debt was just off the 2016 table in the seventh position with 31%
targeting it.
Table I Institutional Investors Focus of Attention Among Private Equity Sectors
Top Five Responses:
2007
Sector
2016
% Targeting
Sector
% Targeting
U.S. Middle-Market Buyouts
49%
U.S. Middle-Market Buyouts
76%
European Middle-Market Buyouts
42%
U.S. Small-Market Buyouts
46%
U.S. Venture Capital
34%
European Buyouts — Pan-European
43%
Distressed Debt
30%
Growth Capital Funds — Developed
Markets
42%
Asian Funds
25%
European Middle-Market Buyouts —
Country or Region-Focused
41%
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2007 Survey and 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
10
© 2015 Probitas Partners
Chart VIII Private Equity Sectors of Interest
During 2016, my firm or my clients plan to focus most of our attention on investing in the following sectors
(choose no more than seven):
76
U.S. Middle-Market Buyouts ($500 million to $2.5 billion)
46
U.S. Small-Market Buyouts (<$500 million)
43
European Buyouts — Pan-European
42
Growth Capital Funds — Developed Markets
41
European Middle-Market Buyouts — Country or Region-Focused
U.S. Large Buyouts ($2.5 billion to $5 billion)
34
31
Distressed Debt Funds
30
U.S. Venture Capital
Pan-Asian Funds
29
27
Asian Country-Focused Funds
26
Direct Lending/Credit Strategies
24
Infrastructure Funds
20
Energy Funds
Restructuring Funds
19
Secondary Funds
19
Mega Buyout Funds (>$5 billion or equivalent)
19
16
Mezzanine Funds
13
Emerging Markets (ex-Asia)
7
Fund-of-Funds
6
Mining Funds
5
European/Israeli Venture Capital
Agriculture Funds
4
Timber Funds
4
4
Cleantech/Green-Focused Funds
0
Shariah-Compliant Funds
8
Other Niche Sectors
0
10
20
30
40
50
60
70
80
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
11
U.S. middle-market buyouts’ top ranking in the survey reflects, in part, the fact that
52% of the respondents were from the United States or Canada. Most investors prefer
local funds and strategies when building out their core portfolio, and then extend
their portfolios geographically as they gain knowledge and experience, and seek
greater diversification. Charts IX and X, respectively, provide a look at the private
equity world through the eyes of European and Asian/Australian/Middle Eastern
respondents, while Chart XI focuses on North American respondents.
ƒƒ Interestingly, Chart IX shows U.S. middle-market buyouts as the top ranked interest
for European investors, while European county-focused and Pan-European funds
ranked second and third, respectively.
ƒƒ Pan-Asian and Asian country-focused funds also charted well among European
investors, as did direct lending funds.
ƒƒ U.S. venture capital was of less interest than it was to overall respondents —
though it outscored European venture capital by a significant margin.
Private Equity Institutional Investor Trends for 2016 Survey
12
© 2015 Probitas Partners
Chart IX Private Equity Sectors of Interest; European Respondents
During 2016, I plan to focus most of my attention on investing in the following sectors (choose no more than seven):
78
U.S. Middle-Market Buyouts ($500 million to $2.5 billion)
70
European Middle-Market Buyouts — Country or Region-Focused
European Buyouts — Pan-European
52
Growth Capital Funds — Developed Markets
48
Pan-Asian Funds
48
Asian Country-Focused Funds
43
U.S. Small-Market Buyouts (<$500 million)
39
Direct Lending/Credit Strategies
30
Infrastructure Funds
30
U.S. Large-Buyouts ($2.5 billion to $5 billion)
26
Distressed Debt Funds
26
Mezzanine Funds
26
U.S. Venture Capital
22
Mega Buyout Funds (>$5 billion or equivalent)
22
Restructuring Funds
17
Emerging Markets (ex-Asia)
17
Energy Funds
13
Secondary Funds
13
European/Israeli Venture Capital
9
Cleantech/Green-Focused Funds
9
Mining Funds
9
Fund-of-Funds
4
Agriculture Funds
4
Timber Funds
4
0
Shariah-Compliant Funds
Other Niche Sectors
13
0
10
20
30
40
50
60
70
80
90
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
13
ƒƒ As shown in Chart X, Asian/Australian/Middle Eastern investors look on Asian
markets more favorably, though both U.S. middle-market buyouts and PanEuropean buyouts are major sectors of choice.
ƒƒ A number of investors make infrastructure investments out of their private equity
allocations rather than separate infrastructure allocations. Asian respondents
were much more interested in infrastructure than other respondents, driven by
very strong support from Japan.
ƒƒ These investors had little interest in energy or U.S. venture capital funds, while
two respondents to the “Other Niche Sectors” option said that they were targeting
Asia/China venture capital.
Private Equity Institutional Investor Trends for 2016 Survey
14
© 2015 Probitas Partners
“Asian
respondents
were much more
interested in
infrastructure
than other
respondents.”
Chart X Private Equity Sectors of Interest; Asian/Australian/Middle Eastern Respondents
During 2016, I plan to focus most of my attention on investing in the following sectors
(choose no more than seven):
U.S. Middle-Market Buyouts ($500 million to $2.5 billion)
58
50
Infrastructure Funds
38
European Buyouts — Pan-European
35
U.S. Large-Buyouts ($2.5 billion to $5 billion)
Asian Country-Focused Funds
31
Direct Lending/Credit Strategies
31
Pan-Asian Funds
27
European Middle-Market Buyouts — Country or Region-Focused
23
Secondary Funds
23
Growth Capital Funds — Developed Markets
19
Mezzanine Funds
19
15
Distressed Debt Funds
U.S. Small-Market Buyouts (<$500 million)
12
Energy Funds
12
Fund-of-Funds
12
Emerging Markets (ex-Asia)
8
Mega Buyout Funds (>$5 billion or equivalent)
8
Agriculture Funds
8
Cleantech/Green-Focused Funds
8
Timber Funds
8
Restructuring Funds
4
U.S. Venture Capital
4
Mining Funds
4
Shariah-Compliant Funds
0
European/Israeli Venture Capital
0
8
Other Niche Sectors
0
10
20
30
40
50
60
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
15
ƒƒ North American respondents were much more interested in U.S. venture capital,
distressed debt, and energy than respondents from other geographies.
ƒƒ There was much less interest in infrastructure funds, though that may reflect that
in North America infrastructure investments were much more likely to be made
through separate infrastructure allocations.
ƒƒ Asian-focused funds also generated less interest from North American respondents.
Chart XI Private Equity Sectors of Interest; North American Respondents
During 2016, I plan to focus most of my attention on investing in the following sectors
(choose no more than five):
U.S. Middle-Market Buyouts ($500 million to $2.5 billion)
85
U.S. Small-Market Buyouts (<$500 million)
66
Growth Capital Funds — Developed Markets
51
U.S. Venture Capital
47
Distressed Debt Funds
42
European Buyouts — Pan-European
42
European Middle-Market Buyouts — Country or Region-Focused
38
U.S. Large Buyouts ($2.5 billion to $5 billion)
38
Energy Funds
26
Restructuring Funds
26
Direct Lending/Credit Strategies
23
Pan-Asian Funds
23
Mega Buyout Funds (>$5 billion or equivalent)
23
Secondary Funds
19
Asian Country-Focused Funds
19
13
Emerging Markets (ex-Asia)
Mezzanine Funds
9
Infrastructure Funds
8
Mining Funds
6
Fund-of-Funds
6
European/Israeli Venture Capital
6
Agriculture Funds
2
Timber Funds
2
Shariah-Compliant Funds
0
Cleantech/Green-Focused Funds
0
6
Other Niche Sectors
0
20
40
60
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
16
© 2015 Probitas Partners
80
100
ƒƒ As far as general geographic interest, the three major geographies — North
America, Western Europe, and Asia continue to dominate investor
interest (Chart XII).
ƒƒ Notably, interest in Asia rebounded somewhat from 49% last year to 56% this year.
ƒƒ Interest in emerging markets outside of Asia remained scattered with no
geography dominant.
Chart XII Private Equity Geographical Focus
During 2016, I anticipate that the three primary areas of geographical focus for our programs will be:
100
94
90
81
Percentage of Respondents (%)
80
70
56
60
50
40
30
20
14
10
4
2
2
1
1
Central and
Eastern
Europe
Sub-Saharan
Africa
MENA
Other
0
North
America
Western
Europe
Asia
Emerging
Markets
Globally
Latin
America
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
17
ƒƒ As far as European markets, interest in the United Kingdom and the Nordic Region
tied this year, a slight shift from last year’s results which had the United Kingdom
somewhat ahead (Chart XIII).
ƒƒ Germany ranked third, and the top three markets strongly outpaced the rest
of Europe.
ƒƒ Italy rebounded slightly from last year’s very low level, while interest in Spain and
France continue to be relatively low.
ƒƒ There was no interest in Eastern Europe as the ongoing Ukrainian crisis and continued
political issues between Russia and the West dimmed investor enthusiasm.
Chart XIII Most Attractive European Markets
For European country/regionally-focused funds, I find the most attractive markets to be (choose no more than three):
58
59
Nordic Region
58
United Kingdom
66
39
Germany
37
16
Benelux
22
14
12
Spain
10
10
France
8
Italy
4
5
5
Central Europe (Poland, Czech
Republic, Hungary, etc.)
1
Eastern Europe (Russia,
Ukraine, Georgia, etc.)
2
18
I only invest via Pan-European funds
15
3
I only invest via fund-of-funds
1
13
I do not invest in Europe
11
0
Other
4
0
10
20
30
40
Percentage of Respondents (%)
2016
2015
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
18
© 2015 Probitas Partners
50
60
70
ƒƒ As Chart XIV highlights, European investors view their home market similarly to
global investors in terms of greatest areas of interest, but with even more focus
on the United Kingdom and the Nordic Region.
ƒƒ The biggest difference between European and other investors is a much stronger
interest in Spain and Central Europe, as well as the fact that fewer Europeans
invest in Europe solely through funds-of-funds.
Chart XIV Most Attractive European Markets; European Respondents
For European country/regionally-focused funds, I find the most attractive markets to be
(choose no more than three):
58
Nordic Region
71
58
United Kingdom
76
39
Germany
33
18
France
14
16
19
Benelux
10
Spain
29
8
Italy
5
3
Central Europe (Poland, Czech
Republic, Hungary, etc.)
10
1
0
Eastern Europe (Russia,
Ukraine, Georgia, etc.)
14
I only invest via Pan-European funds
10
13
I only invest via fund-of-funds
5
5
5
I do not invest in Europe
0
0
Other
0
10
20
30
40
50
60
70
80
90
Percentage of Respondents (%)
Overall Respondents
European Respondents
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
19
Chart XV highlights global respondents’ interest in Asian geographies going
into 2016.
ƒƒ China remains the top Asian geography of interest among all parties; interest
rebounded from only 38% in 2014’s survey to 50% this year.
ƒƒ The biggest differences between Asian respondents and overall respondents is a
much greater interest in Japan, driven by the fact that a large number of Japanese
investors responded to the survey.
ƒƒ In addition, Asian investors are much more interested in Indonesia than other
respondents and are much less interested in India.
Table II highlights how investor interest within the Asian market changed over the
last ten years.
ƒƒ In 2007, China, India, and Japan enjoyed nearly equal investor interest. Since
then, interest in both India and Japan has stagnated (though interest in both
actually increased significantly since last year) while interest in China has surged.
ƒƒ Interest in Southeast Asian funds has only become substantial over the last five
years, driven in part by investors’ desire to diversify away from China exposure.
ƒƒ There are still a number of investors who do not invest in Asia — “I do not invest
in Asia” would have been the sixth ranked answer in 2016 with 15% of responses.
Table II Which Geographies in Asia Are of the Most Interest?
Top Four Response:
2007
Country/Region
2016
% Targeting
% Targeting
Country/Region
China
28%
China
50%
India
28%
Southeast Asia
27%
Japan
25%
India
26%
I do not invest in Asia
25%
Japan
19%
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2007 Survey and 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
20
© 2015 Probitas Partners
Chart XV Most Attractive Asian Markets
For Asian country-focused funds, I find the most attractive markets to be (choose no more than three):
50
China
46
27
Southeast Asia
23
26
India
12
19
Japan
38
14
15
Australia
12
South Korea
4
4
Indonesia
12
2
Vietnam
0
0
0
Taiwan
17
I only invest via Pan-Asian funds
15
5
4
I only invest via fund-of-funds
7
I only invest via global funds
4
15
I do not invest in Asia
4
1
Other
0
0
10
20
30
40
50
60
Percentage of Respondents (%)
Overall Respondents
Asian/Australian/Middle Eastern Respondents
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
21
Emerging Markets
ƒƒ China continues to lead investor interest by a wide margin, thought interest in
India increased significantly, bringing it into second place, driven by hopes that
the new government will be increasingly friendly to business (Chart XVI).
ƒƒ Interest in Brazil fell noticeably in the past year amid economic difficulties and
political turmoil.
ƒƒ With difficulties in Brazil, a number of investors have been looking to diversify
their exposure; interest in Pan-Latin American funds remained strong and there
was increased interest in Peru and Mexico as well.
ƒƒ Elsewhere in Asia, there was a notable increase in interest in South Korea as well
as a large decline in interest in Indonesia.
ƒƒ Interest in Russia, the other BRIC country in our survey, remained very weak as
the Ukrainian crisis and political conflict with the West continued to play out.
ƒƒ Though there has been a lot of talk about sub-Saharan Africa as the latest “hot”
emerging market, interest in our survey remained stable from last year at 6%.
ƒƒ The number of respondents stating that they did not invest in emerging markets
continued its three-year decline, falling from 32% in 2014 to 25% in 2015 and
finally 16% this year.
Private Equity Institutional Investor Trends for 2016 Survey
22
© 2015 Probitas Partners
“Interest in Brazil
fell noticeably
in the past year
amid economic
difficulties and
political turmoil.”
Chart XVI Most Attractive Emerging Markets
Which emerging markets do you find most attractive (choose no more than four):
47
China
44
23
India
15
Pan-Asia
21
13
20
South Korea
7
19
Southeast Asia
14
16
Brazil
22
15
16
Pan-Latin America
8
Indonesia
15
8
Mexico
6
7
Peru
3
6
Central Europe (Poland, Czech Republic, Hungary, etc.)
10
6
6
Sub-Saharan Africa
5
Colombia
8
5
5
Vietnam
4
Turkey
8
Middle East/North Africa
3
4
3
South Africa
3
Chile
1
1
Eastern Europe (Russia, Ukraine, Georgia, etc.)
2
1
Russia
0
5
I only invest via global emerging market funds
2
5
I only invest via emerging market funds-of-funds
3
16
I do not invest in emerging markets
25
2
Other
0
0
5
10
15
20
25
30
35
40
45
50
Percentage of Respondents (%)
2016
2015
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Note: South Africa was added for the first time to the Survey this year, we have no data for 2015
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
23
ƒƒ The prospect of strong long-term economic growth that could positively impact
returns drove investor interest in emerging markets. However, the number of
respondents who felt compelled to invest in emerging markets on that theory
dropped from 77% four years ago to 54% (Chart XVII).
ƒƒ As it was last year, a desire to diversify their private equity portfolio was the
second most popular reason to invest in emerging markets.
ƒƒ The primary reason investors do not invest in emerging markets is their perception
that the risk/return profile in developed markets is more attractive — a perception
that has remained the same over the last three years (Chart XVIII).
Chart XVII Interest in Emerging Market Private Equity
My interest in emerging market private equity is driven by (check all that apply):
Strong long-term economic growth
in a number of these countries
54
Desire to diversify my private equity portfolio by geography
to achieve benefits of lack of correlation
33
I am less interested in emerging markets in general than in
exposure to a few specific countries with large opportunities
16
Lower forecast returns in the established markets of private
equity make this sector relatively more attractive
12
As an institutional investor from an emerging market,
I am looking to support my home markets
2
4
Other
0
10
20
30
40
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
24
© 2015 Probitas Partners
50
60
Chart XVIII Disinterest in Emerging Market Private Equity
For those not interested in emerging markets, I am not interested because (check all that apply):
I find the risk/return profile in developed
markets more attractive
55
I am uncomfortable with the degree of political,
currency, or economic risk in emerging markets
32
These markets are not developed enough
and it is difficult to find experienced
managers with strong track records
26
I am not staffed properly to perform due diligence
on these markets that basically offer emerging
manager risk as well as emerging markets risks
26
As an organization, we are satisfied to get
emerging markets exposure through
publicly-traded securities
19
My private equity program is relatively new,
and we are focused on building exposure in
our core, home markets before diversifying
6
10
Other
0
10
20
30
40
50
60
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
25
U.S. Middle-Market Funds
ƒƒ Fund managers in the large, homogeneous U.S. market are predominantly
differentiated by investment strategies rather than geographic differences.
ƒƒ The majority of respondents indicated a strong preference for funds that
generated returns via operational improvements and were staffed with operating
professionals. This is consistent not only with past survey results but also across
all investor types (Chart XIX).
ƒƒ There is a strong interest in buy-and-build strategies, with the least interest being
for regionally-focused funds.
ƒƒ As far as industry sector-focused funds, both healthcare and technology are the
biggest areas of focus, though 31% of respondents simply target strong track
records (Chart XX).
ƒƒ Both European and Asian respondents are more interested in retail/consumer
strategies, and Asian respondents are much less interested in energy funds.
ƒƒ Within the energy sector, an area with a wide diversity of strategies, midstream
oil and gas funds and diversified funds attract the most interest, though North
American respondents are more focused on upstream strategies (Chart XXI).
Chart XIX Most Attractive U.S. Middle-Market Sectors
Which of these sectors/strategies in the U.S. middle market do you find most appealing
(check all that apply):
Funds focused on operational improvements heavily
staffed with professionals with operating backgrounds
79
Funds focused on buy-and-build strategies
63
Restructuring/turnaround funds
40
Funds focused on single industries
(i.e., energy, retail, healthcare, media)
37
Funds focused on growth companies, often
investing without majority control
31
Regionally-focused funds
18
Strategy is irrelevant, a demonstrable superior
track record is my only concern
22
I only invest via funds-of-funds
0
I do not invest in the U.S. middle market
8
Other
0
0
20
40
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
26
© 2015 Probitas Partners
60
80
Chart XX Interest in Industry-Focused Funds
As far as funds focused on single industries, I am most interested in (choose no more than three):
Healthcare
43
Technology
41
30
Energy
27
Retail/Consumer
12
Financial services
10
Media/Telecommunications
3
Agribusiness
Industry is irrelevant, I simply focus on the best managers
31
I do not invest in industry-focused funds
10
Other
3
0
10
20
30
40
50
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Chart XXI Interest in Sectors within Energy
In the energy sector, I am most interested in (choose no more than three):
Midstream oil and gas funds
37
Diversified funds with broad mandates
33
30
Upstream oil and gas funds
Energy/power infrastructure funds
15
Distressed energy funds
15
8
Renewable energy funds
5
Energy debt funds
I do not invest in funds focused on energy
30
Other
3
0
10
20
30
40
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
27
Venture Capital
“Endowments
and foundations
remain much more
active in venture
capital than other
investors.”
ƒƒ Investor interest in technology only funds decreased somewhat from 29% last
year to 21% this year, while interest in cleantech only funds has continued to
dwindle to a very low level (Chart XXII).
ƒƒ Endowments and foundations remain much more active in venture capital than
other investors and focused on early stage investments, with 57% of those
respondents targeting that stage.
ƒƒ Since 2007, the number of respondents not investing in venture capital has
more than doubled, from 17% then to 37% now — though this year it noticeably
improved from 42% saying they did not invest in the sector in 2014.
ƒƒ European investors are the most negative on the sector, with 46% of respondents
saying they do not invest in venture capital at all, though Asian/Australian/
Middle Eastern investors were not far behind at 42%; North American investors
were more positive, with only 30% not targeting venture capital.
Chart XXII Most Attractive Venture Capital Sectors
In venture capital, I focus on funds active in the following sectors or stages (choose all that apply):
19
Funds investing in multiple sectors
21
Technology only funds
16
Life science only funds
2
Cleantech only funds
Venture debt funds
3
25
Multi-stage
24
Late stage
25
Mid-stage
43
Early stage
20
Seed stage
I am focused solely on historic returns
5
I only invest via fund-of-funds
5
37
I do not invest in venture capital
0
Other
0
10
20
30
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
28
© 2015 Probitas Partners
40
50
Distressed Private Equity
ƒƒ There are several distinct distressed strategies, but many fund managers pursue
a combination of these approaches within the same fund.
ƒƒ Most respondents prefer strategies with a value-added focus that generate higher
multiples of return. In all our previous surveys, restructuring/turnaround funds
and distressed debt for control funds have switched back and forth for the lead
in the sector (Chart XXIII).
ƒƒ For the first time this year we asked investors about their interest in special
situations funds; there was strong interest in these funds across geographies and
they were actually the leading distressed strategy for European investors with
62% of them targeting it.
ƒƒ Opportunistic credit funds (with a strong focus on assets other than corporate
debt) are another area of focus for investors. While some investors have expanded
their distressed debt category to include opportunistic credit, others consider it
a straight credit or fixed income product, and therefore is not included in their
alternatives allocation. Chart XXIII Distressed Investments
Within the distressed debt/restructuring sector, I am most interested in (choose no more than two):
Distressed debt for control
funds (loan-to-own)
48
Restructuring/turnaround funds
(focused on equity, not debt)
44
Special situations funds (usually
combining debt and equity)
43
Opportunistic credit (mispriced
debt, small loan portfolios, etc.)
30
Distressed debt: active/non-control funds
(often hold through restructuring)
18
Distressed debt trading funds
14
Distressed debt hedge funds
3
I do not invest in this sector
12
0
Other
0
10
20
30
40
50
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
29
Credit-Focused Funds
ƒƒ Over the past four years, investors have been increasingly focused on the private
credit sector as they look at opportunities created by the strained bank markets.
ƒƒ Respondents to the survey are more focused on the mezzanine, opportunistic
credit, and senior credit sectors, though a number of investors make their
commitments to these strategies outside their private equity allocations
(Chart XXIV).
ƒƒ Among this year’s respondents, North American investors are more likely to
invest in senior debt out of their private equity allocations with 35% doing so,
while 50% of insurance company respondents invest in mezzanine through their
private equity allocations.
ƒƒ Few respondents to the survey were interested in Business Development
Companies (“BDCs”) or other publicly listed vehicles.
Chart XXIV Credit
In the credit sector, my firm:
Percentage of Respondents (%)
100
39
40
88
35
80
60
18
11
11
16
13
29
40
39
40
20
21
6
0
Mezzanine
Senior Debt
Invests as part of private equity allocation
Is considering investing in this sector
5
5
BDCs/Publicly Listed
Opportunistic Credit
Invests but not as part of a private equity allocation
Does not invest in the sector at all
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Note: Some sectors total greater than 100% as a few investors had multiple responses
Private Equity Institutional Investor Trends for 2016 Survey
30
© 2015 Probitas Partners
Real Asset Funds
Interest in real assets has been growing among sovereign wealth funds and pension
plans with significant long-term liabilities and a desire to pursue strategies that
could be resilient in times of high inflation.
ƒƒ Oil and gas was the only sector that attracted strong interest where the bulk of
the investments made were coming from private equity allocations, though those
investing in oil and gas through private equity allocations dropped from 49% last
year to 34% this year (Chart XXV).
ƒƒ However, the other sectors also attracted interest from general real asset, inflation
hedging allocations, or from specific allocations in sectors such as infrastructure
or timber.
ƒƒ Large investors (those seeking to commit $500 million or more to private equity
in 2016) are much more interested in real assets, while family offices are much
less interested in the sector.
Chart XXV Real Assets
In the real asset sector, my firm:
Percentage of Respondents (%)
100
49
40
64
63
11
11
16
22
54
74
80
13
60
16
3
37
40
34
20
13
14
Infrastructure
Metals & Mining
Invests as part of private equity allocation
Is considering investing in this sector
11
10
11
7
7
6
Agricultural
Farmland
Timber
Ships or Aircraft
0
Oil & Gas
26
Invests but not as part of a private equity allocation
Does not invest in the sector at all
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2016 Survey
Note: Some sectors total greater than 100% as a few investors had multiple responses
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
31
Secondary Market
“The number of
investors who
have sold or
are considering
selling positions
in the secondary
market has risen
to an all-time
high of 40%”
ƒƒ The number of investors who are active in key areas of the secondary market
increased this year; those purchasing direct positions decreased from 50% last
year to 41% this year, while those investing in secondary funds decreased from
49% last year to 40% this year (Chart XXVI).
ƒƒ However, the number of investors who have sold or are considering selling
positions in the secondary market has risen to an all-time high of 40%, up from
31% last year; among North American respondents, 50% look to be active in
selling funds.
ƒƒ For the first time this year we asked whether investors actively invested in fund
restructurings through secondaries; 17% of overall respondents, and 21% of just
North Americans did so.
Chart XXVI Secondary Market Investments
In the secondary market, my firm (choose all that apply):
Actively invests in secondary funds
41
Actively purchases direct positions
in funds in the secondary market
40
Has sold or is considering selling funds in our
portfolio for portfolio management purposes
40
Actively invests in fund restructurings
through secondaries
17
Provides advice to clients on secondaries
15
Actively purchases direct positions in
companies in the secondary market
13
Is not active in secondaries in any manner
19
Other
6
0
10
20
30
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
32
© 2015 Probitas Partners
40
50
Co-Investments and Direct Investments
ƒƒ Interest in co-investments remained relatively consistent over the last year, with
large investors who often have more resources to deploy being more active
(Chart XXVII).
ƒƒ Only 6% of large investors said that they did not pursue co-investments or direct
investments at all.
ƒƒ Family offices are more likely to invest directly in companies, with 50% of them
targeting that strategy.
Chart XXVII Directs and Co-Investments
Regarding directs and co-investments, my firm (choose all that apply):
46
Has an active internal co-investment program
58
25
Only opportunistically pursues co-investments
19
16
Provides advice to clients on co-investment
or direct investments
26
14
Invests directly in companies
10
Requires or prefers a co-investment as a
means of diligencing a new fund manager
12
Has an outsourced co-investment program
3
19
5
18
Does not invest in co-investments
nor directly invests in companies
6
4
3
Other
0
10
20
30
40
50
60
Percentage of Respondents (%)
All Respondents
Large Investors
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Note: “Large Investors” denotes those survey respondents who plan to commit $500 million or more to private equity in 2016
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
33
Fund Structures and Key Terms
ƒƒ As with most of our past surveys, the level of general partner financial commitment
to a fund remains the most important term for investors as it is a key factor in
assuring alignment of interest between limited partners and general partners
(Chart XXVIII), with the overall level of management fees closely behind.
ƒƒ Though there is a degree of commonality in the issues investors focus on, there
are distinct differences as well; Chart XXIX compares the responses of European
respondents to Asian/Australian/Middle Eastern respondents to provide
an example.
ƒƒ As far as strict adherence to the ILPA Principles or the inclusion of a strong
Environmental, Social and Governance (“ESG”) policy, both of which are
frequently discussed, neither of these issues ranked highly, though responses
varied tremendously:
ƒƒ 33% of pension plan respondents targeted strict ILPA compliance and 25%
were focused on strong ESG policies;
ƒƒ None of the family office respondents were focused on strict ILPA compliance;
ƒƒ 35% of European respondents felt that strong ESG policies were important
while 15% felt strict compliance with the ILPA Principles were important;
ƒƒ For North Americans, 15% thought strict adherence to the ILPA Principles was
important while only 7% felt strong ESG policies should be targeted;
ƒƒ None of the Asian/Australian/Middle Eastern respondents targeted ESG
policies as an issue of focus and only 8% felt that strict ILPA compliance
was important.
ƒƒ In past surveys we asked investors in more detail about the ILPA Principles and
found that, though few investors insisted on strict compliance, a majority of
investors of all types used them as a starting point for terms negotiations.
Private Equity Institutional Investor Trends for 2016 Survey
34
© 2015 Probitas Partners
“None of the
Asian/Australian/
Middle Eastern
respondents
targeted ESG
policies as an
issue of focus
[while] 35%
of European
respondents felt
that strong ESG
policies were
important.”
Chart XXVIII Issues Regarding Fund Structure
The issues I focus on most when investing or advising a client as far as terms or structure of a fund are
(choose no more than four):
Level of general partner financial
commitment to the fund
62
Overall level of management fees
55
Distribution of carried interest between
the senior investment professionals
47
44
Structure or inclusion of a key man provision
40
Cap on fund size
36
Carry distribution waterfalls
35
Ownership of the management company
31
Transaction fee splits
29
Level of carried interest
Structure or inclusion of a
no-fault divorce clause
13
Strict adherence to the ILPA Principles
13
Sharing of carry and/or investment decision
making with a third-party sponsor
12
Inclusion of a strong Environmental,
Social, and Governance policy
10
Other
2
0
10
20
30
40
50
60
70
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
35
Chart XXIX Issues Regarding Fund Structure: European Respondents vs.
Asian/Australian/Middle Eastern Respondents
The issues I focus on most as far as terms or structure of a fund are (choose no more than four):
Level of general partner financial
commitment to the fund
70
54
65
Overall level of management fees
58
50
Carry distribution waterfalls
23
50
Cap on fund size
31
40
Distribution of carried interest between
the senior investment professionals
27
40
42
Structure or inclusion of a key man clause
35
Transaction fee splits
23
35
Inclusion of a strong Environmental,
Social, and Governance policy
0
30
Ownership of the Management Company
23
15
Strict adherence to the ILPA Principles
8
Sharing of carry and/or investment decision
making with a third-party sponsor
10
15
10
Level of carried interest
35
5
Structure or inclusion of a
no-fault divorce clause
8
0
0
Other
0
20
40
60
80
Percentage of Respondents (%)
European Respondents
Asian/Australian/Middle Eastern Respondents
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
36
© 2015 Probitas Partners
Investor Fears and Concerns
ƒƒ The greatest fear of most private equity investors was their perception that too
much money was coming into all areas of private equity, followed very closely
by the concern that the private equity market feels like it is at the top of the
cycle (Chart XXX).
ƒƒ Concerns that the market may be at the top of a cycle — with the resulting risk of
a decline in the offing — was actually the greatest fear of insurance companies
(79%), large investors (56%), and Europeans (56%).
ƒƒ Even though middle-market buyouts in North America and Europe were by far
the area of strongest interest for investors, the third-ranked fear of investors, at
41%, was that purchase price multiples for middle-market buyouts are too high
and threaten future returns. This was actually the number one concern of North
American investors, 54% of whom selected it.
ƒƒ Venture capital is a smaller section of most investors’ portfolios, but it is notable
that fears particular to the sector — that another technology bubble is forming,
or that access to top quartile managers is too difficult and new managers are
unattractive — are very low. However, among endowments and foundations who
tend to have a larger exposure to venture capital, their third-ranked fear was that
another technology bubble is forming, with 37% of them mentioning that.
ƒƒ A number of investors submitted their own concerns under the “Other” category;
a selection of those responses are detailed below:
ƒƒ Lack of transparency for portfolio company fees charged by general partners.
ƒƒ The industry has been relatively disciplined compared with 2007–2008.
However, the buildup of “dry powder” and increasing fund sizes will inevitably
change that since the money has to be invested at some point. The impact of
future rate rises on the industry is untested.
ƒƒ Fees (management fees and carry) are compressing returns to
limited partners, making the asset class less desirable versus public
market alternatives.
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
37
Chart XXX Greatest Fears Regarding the Private Equity Market
My three greatest fears regarding the private equity market at the moment are:
Too much money is pursuing too few attractive opportunities
across all areas of private equity
51
The current private equity market feels like we are at the top of the cycle
49
Purchase price multiples in middle-market buyouts are
too high and threaten future returns
41
Purchase price multiples in large-market buyouts are
too high and threaten future returns
33
Management fee levels and transaction fees on large funds are destroying
alignment of interest between fund managers and investors
28
Large firms in the market are becoming generalized asset
managers and moving away from key investment strengths
25
Private equity is most effective as a niche market and too much
money is being raised in all private equity sectors
19
Increased competition among limited partners is
limiting my access to co-investments
13
Generational transitions at a number of long-lived firms are generating
concern about those firm’s future success
12
Too much money pursuing too few experienced private equity
professionals in the hot emerging markets
12
11
Another technology bubble is in the process of forming
Access to top quartile venture capital managers is impossible without
previous relationships, and new managers are unattractive
9
We do not have adequate staff in place to
deal with issues in my current portfolio
6
The number of funds in my portfolio is too
large for my firm to effectively monitor
5
My current strategy prevents me from pursuing interesting
opportunities in the private credit sector
4
I find myself increasingly at odds with other limited
partners due to preferential treatment
3
Given central bank policies, I am not sure there will ever
be a wave of distressed opportunities
2
Decreased leverage availability will hurt companies
needing working capital or re-financing
1
Other
4
0
10
20
30
40
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2016 Survey
Private Equity Institutional Investor Trends for 2016 Survey
38
© 2015 Probitas Partners
50
60
ƒƒ Table III highlights investors’ concerns pre-Global Financial Crisis and compares
them to their fears going into 2016.
ƒƒ Concerns about too much money coming into the market were among the
top issues in both 2007 and 2016. In 2007 investors were very aware that
there was too much debt and too much equity available in the buyout market
and that the strong returns leading up to 2007 and beyond were unlikely
to continue.
ƒƒ Investors are now concerned that purchase price multiples for middle-market
buyouts are too high and that we are at the top of a market cycle — leading to
concerns for future returns.
ƒƒ In the 2016 survey, a quarter of respondents were concerned that large firms
in the market were becoming asset managers focused on growing assets under
management and were moving away from their key investment strengths — an
issue that was not topical in 2007.
Table III What Keeps You Up at Night?
Top four responses:
2007
2016
% Targeting
Issue
% Targeting
Issue
Management fee levels and transaction
fees on large funds are destroying
alignment of interest between fund
managers and investors
51%
Too much money is pursuing too few
attractive opportunities across all areas of
private equity
51%
The amount of leverage in the buyout
market is unsustainable, and over the
next two years credit problems will hurt
performance of recent vintage funds
48%
The current private equity market feels like
it is at the top of the cycle
49%
There is too much money available in
the large buyout market and this will
dramatically impact future returns
39%
Purchase price multiples in middle-market
buyouts are too high and threaten future
returns
41%
Private equity is most effective as a niche
market and too much money is being
raised in all sectors of private equity
35%
Purchase price multiples in large-market
buyouts are too high and threaten
future returns
33%
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2007 Survey and 2016 Survey
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
39
Our View of the Future
Several key trends for 2016 emanate from the survey and our ongoing conversations
with investors:
ƒƒ The dramatic increase in private equity “dry powder” threatens future
returns and nearer term fundraising. Chart XXXI shows just how swiftly
private equity “dry powder” has built up over the last two and a half years,
especially for funds targeting North America. In a market already burdened by
high purchase prices, these levels of “dry powder” put more pressure on fund
managers to put capital to work at what is likely the peak of the market cycle.
ƒƒ Separate accounts are becoming increasingly important to large
investors — and the amounts raised through these accounts are
more opaque then those raised for multi-party vehicles. Separate
accounts — either specifically targeted at a particular strategy or giving
the manager wide latitude to invest across strategies — are becoming
increasingly important to very large investors, not only as a method to reduce
manager costs but also as a way to effectively deploy large sums in capitalintensive sectors such as large buyouts and infrastructure. Commitments
made to these accounts — and the “dry powder” that they engender —
are much more difficult to track than multiparty vehicles.
ƒƒ Smaller investors and the “best of breed” approach. Many smaller,
sophisticated investors continue to take a targeted approach, focusing on “best
of breed” managers in narrower strategies looking to generate alpha in inefficient
sectors such as middle-market industry-focused buyout, growth capital funds,
middle-market distressed, and turnaround vehicles. This approach often requires
both looking at new managers and moving away from established relationships
with managers who these limited partners perceive as having become too large
for their strategies. However, these strategies are not immune to the impacts of
the dramatic increase in “dry powder.”
ƒƒ Private debt funds and the credit cycle. Private debt funds — in private equity,
real estate, and infrastructure — have grown tremendously in interest since the
Global Financial Crisis driven by changes in the regulatory environment. This
growth has resulted in the formation of a number of new funds, some of which
are run by managers with little experience investing across credit cycles.
ƒƒ At the large end of the deal market, sovereign wealth funds and the
largest public pension plans are increasingly competing with fund
managers for deals. These institutions are becoming increasingly sophisticated
direct investors, and they often have longer-term investment horizons and a
lower cost of capital than many funds, giving them unique advantages in certain
circumstances. A number of them are also willing to join direct investment
syndicates for particular deals — making them both competitors and partners to
fund managers.
ƒƒ Unicorns may indeed be mythical creatures. Talk of Unicorns — venture
capital backed private companies with valuations of $1 billion or more — has
been a leading topic of discussion in venture capital circles over the last year as
these mythical creatures seemed to become more plentiful. However, a turbulent
IPO market has increased skepticism over the private valuations of many of these
companies, a trend likely to dampen euphoria that was building earlier this year.
Private Equity Institutional Investor Trends for 2016 Survey
40
© 2015 Probitas Partners
Chart XXXI Private Equity “Dry Powder” by Region Targeted
800
700
USD in billions
600
500
400
300
200
100
North America
Europe
Aug-15
Oct-14
Mar-15
May-14
Jul-13
Dec-13
Feb-13
Apr-12
Sep-12
Jun-11
Asia
Nov-11
Jan-11
Aug-10
Mar-10
Oct-09
May-09
Jul-08
Dec-08
Feb-08
Apr-07
Sep-07
Jun-06
Nov-06
Jan-06
Aug-05
Mar-05
Oct-04
May-04
Dec-03
0
Rest of World
Source: PREQIN
© 2015 Probitas Partners
Private Equity Institutional Investor Trends for 2016 Survey
41
Private Equity Institutional Investor
Trends for 2016 Survey
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