Tuesday, January 31, 2023

Denominator effect hits private equity LP appetite



Coller Capital’s biannual survey of private equity investors has found a softening in sentiment towards the asset class, largely driven by the denominator effect.

Big falls in public markets this year have led private assets to make up a larger proportion of alternatives buckets for many LPs, known as the denominator effect.

Some investors will then lower PE allocations until it falls back in target, or sell chunks of their holdings on the secondary market. Some choose to increase their target, like Iowa Public Employees’ Retirement System earlier this year.

Coller found that 42% of LPs believe the denominator effect is likely to cause a reduction in the pace of their private equity fund commitments over the next one to two years.

This factor was especially salient among larger LPs, with two-thirds of those managing more than $20bn citing the factor.

Across all LP sizes, more than a quarter (28%) said that liquidity shortfalls will lead to a reduction in commitment pace.

Private equity and private credit were far more popular among North American LPs than their public market counterparts. Almost three-quarters of European LPs (72%) were confident about portfolio positioning, ahead of North American (60%) and Asian (39%).

But private equity was the only alternative asset class to have a softening relative to six months prior, with 27% expecting to increase PE exposure, down from 42%.

London-headquartered Coller is a leading investor in the secondary market for private assets. In February it closed Coller Credit Opportunities I, with committed capital (including co-investment vehicles) of $1.45bn backing from 40 institutional LPs.

Read the full survey here.