Survey: Private Equity Brings Institutional Investors Strong Returns, Challenges

By David G. Barry

Institutional investors are pleased with returns from private equity but are concerned about the potential reputational risk from investing in the sector as well as the emergence of non-institutional sources of capital, according to a new survey.

Coller Capital’s latest Global Private Equity Barometer found that 42% of the 110 limited partners (LPs) surveyed had portfolio-lifetime annual returns of more than 16% net. In the 18 years that Coller has been publishing the Barometer, that number has been exceed only once: In the summer of 2007 in the run-up to the Global Financial Crisis. More than 70% of the LPs surveyed also said that their private equity assets have outperformed their public equity portfolios since the GFC.

These same investors, however, are keeping an eye on the rise of alternative sources of capital, such as retail investments or insurance premiums. Today, one-third view these sources of capital as a risk to accessing private equity funds and almost two-thirds see them as an eventual threat to their sector returns.

Some investors also are concerned about their reputations being harmed by activists and commentators focusing on their links to private equity-owned businesses. More than half of public pension plans, endowments and foundations surveyed see this as a “growing risk.”

The economic volatility also has some LPs concerned about their private credit portfolios. According to the survey, one in five European investors and one in three North American investors believe rising interest rates will lead to higher default rates in their private credit portfolios. In fact, while 35% of the LPs have increased their target allocation to private credit over the past two years, 19% have reduced it.

Institutional investors also are having to adapt to attract talent. More than half of those surveyed said they’ve had to change their pay scales and/or working conditions to attract new team members.

Most of the LPs surveyed also believe that environmental, social and governance (ESG) investing creates value in individual portfolio companies. The area that almost all of the ESG-engaged LPs – 93% – felt the strongest about was climate change.

Aside from ESG, private equity managers may soon have to provide LPs with additional data, according to the survey. Between one-quarter and two-thirds of LPs said they plan to ask their GPs to adopt Science-Based Target Initiative into measuring the environmental impact of their portfolios.

Investors seem to be moving cautiously when it comes to investing in cryptocurrencies and the metaverse – the virtual-reality space where users can interact with a computer-generated environment. Today, only 19% of investors are committed or plan to commit to funds that invest using cryptocurrencies while only one-third are already committed or plan to commit to funds that invest in the metaverse.

Founded in 1990, Coller Capital is one of the largest investors in the private asset secondary market. In 2021, it closed its eighth flagship secondary fund at just over $9 billion. Earlier this year, Coller closed its first credit opportunity fund at $1.45 billion.