Some 60% of institutional investors said they expect an increase in mergers and acquisitions in global private markets over the next three to five years, according to Coller Capital’s latest survey on expectations and trends in private markets. Only 11% of respondents anticipated a decrease in M&A activity.
Investors also reported interest in investing in artificial intelligence and private credit. Coller Research Institute, the insights arm of alternative investment manager Coller Capital Inc., released the results of its semiannual private equity barometer, a twice-yearly survey which probes trends and issues on the minds of private equity institutional investors.
Coller surveyed 110 PE investors from around the world, 44 from Europe, 43 from North America and 23 from the Asia-Pacific region. Of the respondents, 29% were responsible for at least $50 billion in assets. The assets under management of all survey respondents totaled $2.2 trillion.
AI and Technology
A plurality of investors said they expect artificial intelligence integration to happen over the next two to three years, as generative AI tools become better and more accessible. So far, very few investors have reported using AI. Only 7% of respondents said they use AI for fund monitoring, 4% for competitor benchmarking, 2% for investment decision-making and 2% for recruitment.
However, a significant number of respondents said they want to use AI for these processes: 38% said they plan to use AI for fund monitoring, 31% for competitor benchmarking, 19% in decision-making and 19% for recruiting.
Many survey respondents reported being interested in investing in artificial intelligence. Among limited partners, roughly 47% said they are interested in venture capital investments, while 25% said they are interested in making AI-related private equity investments. Approximately 54% said they want to develop in-house AI and machine learning capabilities, and roughly 53% said they want to develop sector expertise in AI.
LPs Want Private Credit
Most LPs do not expect venture capital activity to reach 2021 levels in the next year, but about 46% of North American respondents said VC will find a new peak in the next three to five years. European and Asia-Pacific respondents agreed, at 56% and 45%, respectively.
According to the survey, when asked to which asset class they expect to increase allocations over the next 12 months, 44% of LPs cited private credit, followed by infrastructure (27%), alts (25%), private equity (25%), real estate (17%). Only 2% of respondents said they want to increase allocations to hedge funds.
Private credit appears to be drawing strong returns for these LPs as well. When asked about the effect of interest rates on their portfolios, 45% of respondents cited current interest rates for driving strong performance in their private equity portfolios, while 36% of respondents said their private credit returns are neutral. Finally, 19% of respondents responded that their private credit investments are negatively impacted by current rates.
While several banks plan to launch private credit offerings next year, most respondents (76%) said private credit managers will increase lending to private equity at a faster pace than banks, while only 5% said the opposite.
Past, Future Returns
The survey found that 80% of LPs had net annual returns from 11% through 20% across their private equity portfolios. Of respondents, 43% reported returns between 16% and 20%, while 39% reported annual net returns from 11% through 15%.
However, a majority of LPs reported that their private equity general partners are too optimistic in their return expectations, with 75% expressing this view, while 24% said general partners are realistic. Only 1% of respondents said GPs are being too conservative.
A majority, 59%, of LPs expected their portfolios to return from 11% through 15% in the next three to five years. Buyouts are seen as the most optimistic strategy to achieve these returns.
Other Metrics
- 59% of respondents have compensation tied to performance;
- 45% of respondents said money multiple is the most important performance metric, 40% said internal rate of return and 15% said the distributed to paid-in ratio;
- 88% of LPs said they are not prepared to borrow to meet new fund commitments;
- 65% of LPs said they are hesitant to see their GPs deploy dry powder; and
- 79% of LPs said they will continue to evaluate continuation fund opportunities.
Respondents consisted of about 17% public pension funds, 17% insurance companies, 14% corporate pension funds, 14% family offices or trusts, 11% banks investing third-party funds, 10% endowments/foundations, 7% SWFs or other government-owned organizations, 6% banks investing their own capital and third-party funds, 3% banks investing their own capital only and 1% corporations.
Related Articles:
Why Private Equity Is Still Dogging It
How Private Equity Firms Can Protect ‘Treasure Trove’ From Digital Threats
Inside the World of Private Equity: Anxiety, Elation and Sangfroid
Tags: Alternatives, Coller Capital, Coller Research Institute, Private Credit, Private Equity, Private Equity Barometer