Investors look at private equity despite bumpy ride on public markets

Despite European public equity markets tumbling, private equity is yet to experience the sharp downturn it suffered in the last financial crisis, with investors still showing interest in the strongly performing asset, said independent alternative assets research firm Preqin.

Alex Jones, Preqin’s UK-based spokesman said that there was stronger investor interest recently in small- to mid-market buyouts funds over large and mega-cap funds.

“While the Eurozone is currently experiencing market volatility, there have yet to be any major signs of institutional investors abandoning plans to allocate capital to Europe-focused private equity,” Jones said.

Jones notes that in the wake of the financial crisis there has been a decline in fundraising on a global basis for large and mega-cap equity buyouts.

But Preqin has found that there has been a recovery in the European fundraising market.

Europe-focused buyout funds of all sizes have been successful in exceeding their fund target in the 2011 year to date.

Over this period small-cap funds achieved a 107 per cent of their target on average, mid-cap 112.6 per cent and large-cap 125 per cent.

Amongst mid- and large-cap funds had the lowest average time taken to attract enough investor, taking 10 and seven months on the road respectively.

In its second quarter global investor study of limited partner attitudes towards private equity revealed 49 per cent of LPs interviewed would look to invest in small- to mid-market buyout funds over the next 12 months.

This compared to just 9 per cent of respondents that were looking to invest in large or meg-cap funds over the same time period.

Preqin defines small buyouts as less than or equal to $500 million, mid-buyout are between $500 million and $1.5 billion. Large buyouts are defined as $1.5 billion to $4.5 billion and mega buyouts are more than $4.5 billion.

“While many fund managers have come to market with more modest targets to match the overcrowded and difficult fundraising environment that currently prevails, small- and mid-market funds are certainly doing better relatively,” Jones says.

“The one thing that shows is that those managers that can demonstrate success and strong returns are still able to attract investors to their funds and still reach close.”

Adveq executive director Tim Creed (pictured), who heads the private equity fund of fund’s European arm, said there has been strong interest in smaller private equity deals, with quality managers highly sort after.

They focus on a universe of 500 small private equity fund managers who typically raise between $100 million and $200 million.

“We are finding a lot more people are talking about small buyouts because a lot of investors are concerned about the capital overhang in the large buyout segment because everyone knows there is too much money there,” he says.

“That means that more people are looking at small buyouts than in the past but they are finding that in 500 small managers in Europe that quality range is so broad, whereas the quality range at the larger end is smaller.”

Creed said they backed fund managers who had a specialist knowledge of a particular industry and who kept their fund small, with a considerable amount of general partner money invested in the fund.

Jones said that while private equity generally suffered a short-term under-performance relative immediately following the crisis the whole-of-industry performance had rebounded more strongly than other asset classes.

“If we look at the median performance of public pension plans’ investment portfolios over one-, three-, five- and 10-year horizon periods, it is apparent that over five and ten years the median performance of private equity investments has exceeded public equities and other areas of the portfolio,” Jones said.

“Additionally, during the period covering the crisis the private equity investments of public pension plans were only out-performed by hedge funds and fixed-income assets.”