Coller survey finds investors happy with PE leverage

GLOBAL - Amid growing reports of a return to the bad old days of too-easy money for the leveraged buyout (LBO) market, the 14th biannual Coller Capital Global Private Equity Barometer finds that most limited partners (LPs) feel that the private equity debt markets are functioning well, buyout debt-to-equity ratios are about right and general partners (GPs) will continue to focus on operational improvements even as investment and financing conditions improve.

 

The Barometer also reveals a huge pick-up in forthcoming secondary market activity, as well as insights into the time and resources institutions devote to their private equity portfolios.

 

Sixty percent of the 110 respondents to the survey felt that "All or most high-quality deals are being funded to an appropriate level", with the remainder split evenly between those who feel financing is too tight and those who feel it is too loose.

 

Almost two-thirds feel the debt-to-equity levels in buyouts are "About right". Of the remainder, more were concerned that leverage was too low than too high.

 

The results give the lie to reports that investors are growing worried about a return to pre-crisis habits of runaway leverage and financial engineering - only 15% of respondents felt GPs would abandon their focus on operational improvements as investment conditions picked up.

 

In fact, 69% said they regarded the recent return of one of those pre-crisis financial engineering strategies - dividend recapitalisations - as a "positive".

 

Dividend recaps - where a GP takes on more debt to increase dividend payments to LPs - usually entail trading part of a future exit multiple for liquidity today, and the willingness to give up some of that upside may reflect LPs' increasingly positive outlook.

 

While the median respondent still expects one-in-five GPs to "fail", that is down from the one-in-four that the survey suggested two years ago; the proportion of investors that have made net lifetime returns of 11-15% or more has increased to 62% (from just 49% a year ago); and more than twice as many LPs (27%) intend to increase their target allocation to private equity over the next year than reduce it (12%).  

 

But to increase allocations, LPs need to make new commitments, and so the welcoming of dividend recaps may well indicate how anxious LPs are to see some cash after three years of sluggish redistributions - even as 64% of the survey respondents expect a significant increase in exits to trade buyers over the next 12 months, and another 18% expect as much within 18 months.

 

Stephen Ziff, a partner at Coller Capital, said: "LPs want to see distributions, of which there has been a shortage following the crisis. With regard to whether an LP would prefer distributions from trade sales rather than dividend re-caps, it's important to recognise that it's not an either/or situation.

 

"You may have a technology company where there's a healthy M&A market, yet [it is] unsuitable to leverage. But on the other hand, you may have a company with slower growth where the cash flow is good and you can get a dividend re-cap, and where equity multiples are not quite where you'd like them.

 

"A GP that wants to pursue a dividend re-cap will probably also want to pay down the debt incurred before pursuing an exit."

 

Another route to achieving liquidity for an increase in or re-shaping of one's private equity portfolio is the secondaries market, where the survey picks-up plans to increase activity to unprecedented levels.

 

More than one-third of North American LPs, one-quarter of European LPs and as much as 42% of Asia-Pacific LPs plan to sell secondaries within the next two years. In 2008, only 22% of survey respondents had ever sold in the market.

 

This and recent surveys paint a picture of an LP community becoming steadily more active with its private equity commitments, which in turn influences attitudes to resourcing.

 

The latest survey found individuals at government-owned organisations, asset managers, banks, insurance companies and public pension funds spending 65% or more of their time solely on making and monitoring private equity investments.

 

Individuals at family offices, endowments, foundations and corporate pension funds spend around 45% of their time on private equity.

 

It is, therefore, no surprise to find that 47% of public pension funds and more than 40% of insurance companies expect to hire more private equity professionals.

 

"There's been a steady increase in the target allocation toward private equity since the crisis, and investors are also trying to bring more skills in-house," said Ziff. "The proportion of time spent on private equity by LPs diminishes as you move from the public to the private and corporate sectors.

 

"In public bodies, you often have other teams focused on the non-private equity monitoring jobs, which means teams can be more dedicated to the task in hand. Often this reflects the nature and size of these respective organisations.

 

"Coming out of 2009, investors are recognising that private equity is evolving as an asset class and that there is greater need to manage it more actively.

 

"Part of that comes from the challenges that were thrown up in 2008-09. But part of it is a desire to, for example, focus on a smaller core key GP relationships - which requires a realisation of capital from elsewhere."

 

The 14th Coller Capital Global Private Equity Barometer surveyed 110 LPs, 43% of which were based in Europe - 27% were pension funds and 16% insurance companies.