Investors in private equity funds are not shy about expecting big returns once again, and they are being more disciplined about firing managers who aren't delivering returns.
One-third of investors in a new survey expect to achieve annual net returns topping 16 per cent from private equity. The survey of private equity limited partners, commissioned by Coller Capital Inc., showed a whopping 87 per cent expect more than 11 per cent.
"There's a fairly healthy return to optimism about the asset class," said Sebastien Burdel, a principal at Coller. The result is that more investors are looking at increasing their allocations to private equity.
The best returns are expected to come from small- and medium-sized buyouts in North America, which is good news for Canada's buyout business, which is very much concentrated in those brackets.
To be fair, expectations never got very low, despite the headline-making troubles of some private equity managers dealing with over-levered top-of-the-bubble purposes.
The nadir was a year ago, when 29 per cent of LPs still expected better than 16 per cent on their investments.
But those headlines did make an impression on investors, who are now more bullish on smaller buyouts that use less leverage.
"There is still a hangover in the market of the mega buyout bubble," said Mr. Burdel. "Investor sentiment around large and mega buyouts is still mixed. It's very clear in the last 18 months that the large buyout managers have done in my mind a very good job at salvaging value, rebuilding value in the businesses."
"All that being said, there's still a fairly high level of leverage on many of these investments, and the investor community as a whole is still skeptical of the ability of those large fund manager to deliver outsized returns."
One way skepticism is manifesting itself is in an increased willingness to say no thanks when fund general partners ask LPs to commit more capital. So called "re-up refusals" are on the rise, particularly in Asia and Europe.
"LPs are looking again at their portfolios and saying we're going to manage those professionally and we're going to be disciplined," Mr. Burdel said. "You do see now, both in Europe and Asia, some healthy levels of LPs saying we won't be shy about turning down GPs that haven't performed for us."
Nine out of 10 European investors said they have rejected GP requests for reinvestment, up from 63 per cent two years ago. Seven in 10 Asia Pacific investors said no thanks at least once in the past year, compared with half two years ago. North Americans have always been a bit tougher to work for, judging by the Coller figures. "The proportion of North American investors (84%) refusing 're-ups' has remained consistently high," Coller said.
Eds Note: This version corrects an earlier post that contained an incorrect quote.