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Private equity leads the way in alternate assets.

Dubai: Private equity industry is leading the investor exposure to alternate asset classes with two in five limited partners (LPs) planning an increased target allocation to the asset class in the next twelve months, according to Coller Capital's latest Global Private Equity Barometer.

According to the study, although one third of investors say they will increase their allocation to real estate, the same proportion will reduce their allocation to hedge funds. Separately, almost two thirds of LPs say they expect large private equity investors to review their hedge fund exposure in the wake of CalPERS' (California Public Employees' Retirement System) decision to stop investing in the asset class.

Strengthening return expectations are seen as the main reason for private equity's popularity with investors. Almost all (93 per cent of) LPs are now forecasting annual net returns greater than 11 per cent from their private equity portfolios over a 3-5 year horizon. A quarter of LPs are forecasting net returns of over 16 per cent.

"In today's low-yield world it's hugely impressive to see such a high proportion of private equity investors expecting annual net returns of more than 11 per cent," said Jeremy Coller, CIO of Coller Capital, " and Limited Partners are telling us there is more to play for. They believe private equity returns could get even stronger with further enhancements to General Partners' operational skills and more specialised funds"

Emerging economies remain strategically important for private equity industry with 15-20 per cent of LPs planning to begin or increase PE commitments to China, Hong Kong, Taiwan and South East Asia.

Another popular region is Latin America, where one in seven LPs expects to begin or increase commitments. India is the area over which investors see most uncertainty. While about 8 per cent of LPs plan to increase and to reduce their commitments in the subcontinent.

LP backing for funds taking minority positions in private companies looks to remain strong. Half of investors are already committed to such funds, and an additional 13 per cent of LPs said they are likely to seek this kind of exposure in the future. Investors will also be interested in GPs with strong buy-and-build credentials -- two thirds of LPs believe buy-and-build investments will outperform other buyout investments in the next 3-5 years.

Private equity investment in aACAyreal assets' is another increasingly popular area. Two thirds of LPs already have private equity exposure to energy-focused funds; half have private equity exposure to real estate.

Banks' relatively weaker position in credit markets is illustrated by LPs' views on future sources of debt funding for buyouts: just over a third of investors expect banks to take a bigger share of buyout debt in the next three years.

The Barometer confirms that the trend toward more direct investing by LPs (proprietary investments into private companies and co-investments alongside GPs) will continue. Approaching half (45%) of today's LPs do no direct private equity investing or have less than a tenth of their exposure to aACAydirects', but only one in five LPs expects to be in the same position in five years' time.

About 88 of private equity investors (most of whom are male) believe that a higher proportion of women in senior positions at GPs would have little direct impact on private equity returns. However, three in five LPs also believe that PE firms benefit more broadly from gender diversity. Around 70% of these investors say that greater gender diversity at senior levels results in better team quality and team dynamics in private equity firms.

DC pension funds

Attempts are currently being made to solve the problems associated with defined contribution (DC) pension plans investing in private equity. The Barometer shows that a large majority (88%) of Limited Partners expect these initiatives to succeed, and that DC plans will make private equity commitments over the next five years.

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Publication:Gulf News (United Arab Emirates)
Date:Dec 22, 2014
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