Asset AllocationDecember 9, 2012

Performance-Linked Pay: A Win for Private Equity Investors

<em>Private equity investors whose remuneration is tied to the performance of their portfolios have achieved significantly higher returns than their peers over the last five years, according to Coller Capital.</em>

Reported by Featured Author

(December 9, 2012) — Private equity investors have gained from performance-linked pay, according to private equity manager Coller Capital’s latest Global Private Equity Barometer.

Over half (55%) of limited partners (LPs) with performance-related pay have achieved net annual returns greater than 11% over the last five years, compared with less than a fifth (19%) of other LPs, stated the survey, conducted by Arbor Square Associates for Coller Capital in September and October. Respondents encompassed 131 private equity investors.

Commenting on the Barometer’s findings, Jeremy Coller, CIO of Coller Capital, said: “Private equity is all about alignment. The Barometer’s findings on performance-related pay show this is just as important for Limited Partners as it is for General Partners. Take a pension plan: it can only achieve strong returns from private equity by consistently selecting the right managers – and to do that you need talented, experienced and motivated people doing the selecting. To underpay the people investing their pensions simply isn’t in the interests of pensioners!”

The study found that limited partners’ plans and expectations for private equity are positive overall, but LPs identify discrete challenges in each of the key regions of the private equity world – some of which will change how they commit to the asset class.

Four out of five LPs are forecasting net annual returns of more than 11% from private equity over the next 3-5 years, and 28% of investors expect returns of more than 16% in the same period, Coller Capital noted. “As a result, investors plan to increase their target allocations, and accelerate their commitments, to the asset class. Over the next 12 months almost one third (30%) of LPs will raise their target allocation to private equity and a third plan to accelerate their private equity commitments,” the study said, specifying that buyouts in the developed markets of North America and Europe are regarded as the most attractive area of private equity. Asia-Pacific buyouts, which topped the chart three or four years ago, are somewhat less popular today.