Alt Investments
UK Private Equity GPs Feel The Squeeze Over Share Of Earnings - Investec Survey
Fewer general partners in UK private equity funds expect to earn a share of the profits that these investments may generate – known as carried interest – than was the case 18 months ago, suggesting the sector has been squeezed amid recent economic volatility, according to Investec Fund Finance.
Some 76 per cent of GPs expect to receive carried interest from current funds compared to 83 per cent in August 2009. 107 respondents to the survey, taken in January, were predominantly from mid-market firms, with 24 per cent of respondents from professionals with funds greater than £1 billion in size.
The survey gives some insight into the health of the private equity sector, which was hit by the 2008 credit crunch and has been slowly recovering as firms seek to put their money to work.
Recent evidence suggests that returns from such funds has shown robust, if not spectacular, results. Private equity funds showed annualised returns over one year to 30 June last year of 17.6 per cent, while five-year annualised returns were 15.7 per cent, according to figures from Preqin, the research firm, in a report issued in February this year.
In the Investec survey, more than three quarters (77 per cent) of GPs surveyed believe that carried interest still represents their main opportunity for future personal wealth creation (compared with 79 per cent in 2009). This optimism may be explained in part by the positive outlook that the majority of GPs have for the UK economy, with 81 per cent expecting the economic environment to improve over the next 12 months.
One in four (26 per cent) private equity professionals also say they are completely reliant upon carried interest as a means of investing in future funds.
The priorities of private equity fund managers have also changed. Over the next 12 months, the majority of GPs say their company will focus on restructuring and refinancing portfolio companies, whereas 18 months ago these activities were ranked as being of the lowest priority.
Making new investments has slipped from being of the highest priority in 2009 to among the lowest for 2011, even though most funds have significant undrawn commitments, and are quickly approaching the end of their investment period.