EUROPE - Almost half of the limited partners (LPs) surveyed in Coller Capital's latest Global Private Equity Barometer, 45%, feel that private equity has a bad reputation outside the industry - but two-thirds think this is undeserved and that LPs should do more to speak out on behalf of the sector.

Coller Capital partner Stephen Ziff acknowledged that the noise surrounding Bain Capital co-founder Mitt Romney's US presidential campaign had probably been the main source of this perception among North American LPs, but suggested that the broader macro sentiment was more important in informing European perceptions.

While only 10% of LPs thought that private equity was perceived in a good way outside the industry, 68% of North American and 62% of European respondents feel this reputation is undeserved, and two-thirds also think that the LP community and its representative bodies, such as the Institutional Limited Partners Association (ILPA), should speak out more robustly in defence of private equity.

"[The] ILPA's work has been focused on LP-GP relationships," said Ziff. "But there is evidently a feeling that all stakeholders need to be working together to improve perceptions of the industry."

This is an important agenda, as the survey indicates that 32% of LPs plan to increase their allocations to private equity, and 42% expect it to increase as a share of their portfolios.

There is also evidence of deepening relationships between LPs and GPs, in the form of increasing direct co-investment and 'special accounts'.

The survey reveals that the proportion of LPs investing directly (either on a standalone basis or by co-investing) has almost doubled, to two-thirds, in the six years since the Summer 2006 Barometer.

Over the next three years, 42% of LPs plan to increase their level of direct investment.

Fifteen percent of the surveyed LPs go so far as to prioritise GPs that offer co-investments.

"Those LPs who have larger pools of capital and, crucially, more resources and expertise want to deploy those more effectively and selectively by supplementing their fund investments with direct investing," Ziff said.

However, the Barometer also picked up on some growing resentment - probably among smaller LPs - at signs that a two-tier investor community might be emerging.

One in eight LPs surveyed, and almost a quarter of those managing assets worth more than $20bn (€16bn), have 'special accounts' with their GPs - investment vehicles specific to them that may have tailor-made portfolios, risk profiles and economic terms and conditions that differ from the GP's pooled vehicle.

"We are seeing an increasing bifurcation between the larger LPs who are looking to get special accounts, and the rest," Ziff said.

"There are concerns about different economics, but also about whether holders of special accounts might benefit from different opportunities that the other LPs won't see.

"If you've got different economics you can get different incentives. Does GP behaviour change because of those different incentives? If a deal is good, then shouldn't everyone benefit from it? If it's not a good deal, why are you making the investment at all?"

Almost half of the LPs surveyed, 48%, see the increasing number of special accounts as a negative development that has the potential to create these conflicts of interest.

Elsewhere in the Summer Barometer is confirmation of the significant trend towards investing in secondaries, with almost two-thirds of LPs planning to buy or sell over the next 2-3 years, but also of the dire performance of European venture capital.

While the median Asia-Pacific venture fund has achieved a lifetime return of 11-5% and the median North American fund 6-10%, the median European venture fund has posted a return of less than 5% - and one-third of European venture investors have actually lost money.

Globally, 72% of LPs think European venture has no chance of revival without government support in the form of tax incentives and regulatory changes; and scepticism that even this might not be enough is more pronounced among non-European LPs.

Asked if Coller Capital sees any effect of this pessimism or frustration in secondary markets for venture interests, Ziff said this had not been researched in detail, but added: "To be honest, if performance simply isn't there, full-stop, then pricing discounts become academic."

The survey also picked up growing pessimism about Europe's economy relative to North America's.

General gloominess around the macro picture may be reflected in LPs' expectations for opportunities in distressed debt: 89% of those surveyed anticipate 11%-plus returns from this sector over the next 3-5 years, and 61% expect up to 15% returns.

However, despite the level of stress in European economies and markets, only 38% of European LPs currently invest in distressed debt, compared with around two-thirds of North American and Asian LPs. 

"Since 2008, the proportions of LPs with investments in distressed debt haven't really changed," said Ziff.

"You might have expected European interest to have picked-up because it's in their line of sight. But this has more to do with whether the opportunity has actually arisen and how familiar they are with the product.

"For that reason, I suspect this data is telling us that European LPs haven't seen much opportunity in their domestic markets, and that it hasn't materialised on the scale some perhaps expected."

The 16th edition of Coller Capital's Global Private Equity Barometer was based on a survey of 101 private equity investors, 40% of which were based in Europe and 25% of which were pension funds.

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