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Investec research shows evidence of returning optimism amongst private equity GPs


- 83% of GPs expect to receive carried interest from current funds
- 37% of GPs anticipate that their next fund will be bigger than their current one 
- 80% expect the economy to improve or remain the same over next 12 months 
- Main priority for GPs over next 12 months is to ensure good management of existing portfolio companies

One year on from the collapse of Lehman Brothers, the private equity industry appears to be witnessing aresurgence in levels of optimism, according to new research1 from Investec Private Equity Fund and Partner Finance. Indeed, just over a third of General Partners in the UK private equity industry now anticipate that their next fund will be bigger (37%) than their current one.

Chart 1: Approximately how will the size of your next fund compare to the current one?

*Hover over pie chart for percentages

A further 43% expect their next fund to be the same size, while just 6% believe it will be smaller. However, over one in 10 (11%) of GPs interviewed said that their firm would not be raising another fund.

Simon Hamilton, Private Equity Partner and Fund Finance, Investec Private Bank, says: “Our research suggests that the UK private equity industry is in a relatively upbeat mood despite challenging market conditions. There is also an encouraging level of optimism about future fundraising abilities both in the near and long-term.

“LPs and employees of portfolio companies should find this research very encouraging since the professionals who manage the investments are both optimistic about the companies they have backed, and have prioritised the need to work with them closely over seeking out new opportunities.”

Despite the impact of the global economic downturn, the vast majority (83%) of GPs also expect to receive carried interest from their current funds, which appears to contradict the expectations expressed by many LPs at present. 

Chart 2: Do you think you will receive carried interest from your current fund?

*Hover over pie chart for percentages

And more than three quarters (79%) of GPs still believe that carried interest represents their main opportunity for personal future wealth creation, demonstrating that the industry still has hunger to deliver the returns sought by LPs.

The news bodes well for future fundraisings as more than a fifth (22%) of those interviewed state that they are very or completely reliant on this carried interest in order to invest in future funds. However, as a result of the slowdown in distributions from past funds and the increase in investment activity in current funds, Investec has witnessed concern amongst some GPs over how they will fund their own commitments to the funds.

Chart 3: To what extent are you reliant upon receiving carried interest in order to invest in future funds?

*Hover over pie chart for percentages

The Investec Private Equity Fund and Partner Finance team focuses on the financing needs of leading private equity professionals, investors and funds. Investec offers a broad range of financing facilities tailored to the unique requirements of the private equity sector.

Typically, the loan sizes are greater than £3 million and are secured against the private equity investments, management company cash flows or investor commitments.

Simon Hamilton comments: “It is encouraging that the personal motivation, through carried interest, is still considered achievable by most GPs and future carry represents the main driver of personal wealth creation. However, GPs do face some challenges, from partnership succession planning to how they motivate their team when they do not think they will raise another fund. They also have to consider how, with the general slowdown the industry has seen in carried interest being returned, they will fund their personal commitments to the funds.

“Given the current economic environment we are seeing more GPs and others involved in the private equity sector looking at ways to raise finance for a variety of different purposes, including investing in current and future funds, succession planning within the partnership and employee incentivisation programmes..”

Simon Walker, BVCA Chief Executive, comments: “While these findings are encouraging, the private equity industry is still facing a testing time. From access to debt, the impact of the recession on portfolio companies and the threat of European regulation of private equity, any grounds for cautious optimism must be weighed against the challenges facing the industry over the next few months and years. However, with the right support from policymakers and continued LP confidence, private equity will continue to outperform other asset classesgrow companiesand create jobs.”

Investec’s research also reveals that the main priority for the next 12 months for private equity professionals is ensuring good portfolio management. This is followed by finding new investments and looking to make exits. Restructurings and refinancings were cited as being of the lowest priority, perhaps as a result of increased optimism about the outlook for the economy and many refinancings or restructurings already having taken place in the past 12 months.

Chart 4: Which of the following best describes your expectation for the UK economy over the next 12 months?

*Hover over pie chart for percentages

Investec believes that the overall optimism within the UK private equity industry is explained by the equally positive view GPs have on the prospects for the UK economy over the next 12 months. Investec’s research reveals that private equity professionals are generally neutral or optimistic about the economic outlook with 80% expecting it to improve or remain the same. Only 20% expect any decline.

To find out more about Investec's Private Equity Fund and Partner Finance services visit their site.

1 Research conducted by Investec Private Bank in August and September 2009 amongst 120 senior practitioners in UK-based private equity firms. Respondents were predominantly from mid-market firms, with 17% of responses from professionals with funds greater than £1 billion in size.