Private Equity Investors Worry About GP 'Strategy Drift'

- LPs are becoming more choosy and favouring 'recession-proof' sectors as the
downturn bites

NEW YORK, June 9 /PRNewswire/ -- Three quarters of institutional investors
in private equity (LPs) are worried that private equity fund managers (GPs)
will stray into strategies or geographies where they lack expertise, according
to Coller Capital's latest Global Private Equity Barometer. North American LPs
see the danger as particularly acute -- 84% of them perceive GP 'strategy
drift' as a risk to their returns.
Investors are aware that their own growing appetite for the asset class is
partly to blame: well over a third of LPs (38%) are planning to increase their
allocations to private equity over the next year (with only 3% planning a
reduction). Strong returns will also continue to attract new investors to the
asset class, LPs think -- four out of five existing investors expect a
significant influx of new LPs over the next three years.
Investors believe growing institutional appetite for the asset class will
increase the premium on LP talent -- 77% of current investors see the market
for LP skills becoming significantly more competitive over the next three
years. In fact, half of LPs even expect institutions to increase their
recruitment from private equity firms as the 'talent war' intensifies.
Opportunities in the new investment climate
The best opportunities in private equity in the coming year will be in
small and medium-sized European buyouts, LPs think. The lower end of the
buyout market is expected to be attractive everywhere -- especially for small
(less than $200m) and mid-market investments (deals of $200m-$1bn).
In today's climate, investors see the most attractive opportunities for GP
investment in sectors with long-term growth potential -- healthcare and
technology, for example. Sectors most at risk from economic downturn -- like
real estate and consumer industries -- are considered less attractive.
The prospect of a prolonged downturn is reflected, too, in a stronger
preference for distressed debt. Over a quarter (28%) of Asian LPs and almost a
fifth (18%) of European LPs plan to begin investing in distressed debt for the
first time in the next 12 months. This surge in interest is explained by
investors' return expectations -- half foresee returns of 16%+ from distressed
debt over the next 3-5 years. Plans to commit to this sub-asset class for the
first time are less pronounced among North American investors -- a far higher
proportion of whom (65%) are already invested in distressed debt.
Mezzanine, too, is expected to attract more first-time commitments in the
coming year. The proportion of Asian LPs investing in mezzanine is expected to
double over the next 12 months -- from 17% to 34%. More modest first-time
investment in North America and Europe will take LPs' exposure to mezzanine in
these regions to 50% and 63% respectively. 70% of LPs expect returns of 11%+
from mezzanine over the next 3-5 years.
The secondaries market
Investors are active buyers as well as sellers in the secondaries market.
More than 1 in 5 LPs (22%) have sold assets as secondaries, and 1 in 3 (35%)
have bought assets in this way (excluding funds-of-funds.) Although LPs think
liquidity will be an important reason for selling in the next couple of years,
the desire of investors to focus on their best-performing GPs is expected to
be a still more important driver of sales. LP usage of secondaries to
re-balance their portfolios between types of private equity (venture and
buyouts, say) is also expected to be a significant driver of the market.
Sovereign wealth funds -- competitors or collaborators?
Sovereign wealth funds (SWFs) are engaging with private equity at many
levels, not only as investors in private equity funds -- where their
importance is still growing -- but also as players in the market itself. LPs
are divided about the threat SWFs pose to GPs: 58% think they are, or are
becoming, significant competitors to buyout firms. But, arguably more
importantly, a large majority of investors (80%) expect significantly more
strategic partnerships between GPs and SWFs in the next couple of years.
Commenting on the Barometer's findings, Jeremy Coller, CIO of Coller
Capital, said: "We are living in interesting times. Institutional appetite for
private equity is growing -- at a time when the climate for GP investment has
become trickier. This combination is rightly sounding warning bells among
investors. They know the dispersion of returns between more and less able GPs
rises in tougher times, so worrying about GP 'strategy drift' and focusing
more resources on their strongest managers are very sensible responses to
today's climate."
Other topics covered in this edition of the Barometer include:
-- The effect of the credit crunch / downturn on LPs' 'lifetime' portfolio
returns
-- The expected pace of GP investment

For further information on Coller Capital's Global Private Equity
Barometer, please contact any of the following:
Chris Tofalli + 1 914 834 4334
Tofalli PR, New York chris@tofallipr.com

Notes to Editors
LPs (Limited Partners) are investors in private equity funds. GPs (General
Partners) are private equity fund managers.
Coller Capital's Global Private Equity Barometer is a unique snapshot of
worldwide trends in private equity -- a twice-yearly overview of the plans and
opinions of institutional investors in private equity based in North America,
Europe and the Asia-Pacific region.
This latest Barometer captured the views of over 100 private equity
investors from around the world during spring 2008. The Barometer's findings
are globally representative of the LP population by: investor location; type
of investing organisation; total assets under management; and length of
experience of private equity investing.
About Coller Capital
Coller Capital, founded in 1990, is the leading global investor in private
equity secondaries -- the purchase of original investors' stakes in private
equity funds (venture capital, buyout and mezzanine) or the acquisition of
portfolios of companies from corporate owners/backers. Coller International
Partners V, which closed in April 2007 with commitments of $4.8 billion, is
the largest secondaries fund in the world. The firm invests anything from
$1 million to more than $1 billion in individual transactions.
Coller Capital's name is synonymous with the development of the
secondaries market. In 1994, the firm launched Europe's first secondaries
fund,
and in 1998 the first global secondaries fund. Coller Capital has also been
responsible for many of the industry's most notable transactions, including:
the $1 billion purchase of NatWest's private equity portfolio from the Royal
Bank of Scotland; the first major purchase of a corporate venture portfolio --
27 technology companies from Lucent's Bell Labs; and the acquisition of a
$900 million portfolio from Abbey bank.
For more information about Coller Capital, visit the firm's web site at:
www.collercapital.com
SOURCE Coller Capital

Chris Tofalli of Tofalli PR, +1-914-834-4334, chris@tofallipr.com, for Coller
Capital