LIMITED partners (LPs) are cautious about venture capital portfolios, with some 75 per cent expecting more down rounds in their portfolios in the next 12 months, Coller Capital Global Private Equity Barometer Summer 2023 indicated.

The alternative asset manager on Monday (Jun 12) reported that 59 per cent of Asia-Pacific (Apac) LPs expect more down rounds in the coming 12 months, compared to 24 per cent of Apac LPs who expect fewer down rounds.

Some 35 per cent of Apac LPs forecast general partners (GPs) to draw down less money compared to two years ago, versus 20 per cent of respondents who expect GPs to draw down more money.

Noting Apac investors’ positive outlook for private equity (PE) in their own regions in 2023 and 2024, Coller Capital head of Asia Peter Kim said a majority of LPs plan to increase or maintain their allocation in the next 12 months.

About 70 per cent of Apac LPs believe these will be strong vintage years, the report indicated. In comparison, 37 per cent of LPs said 2023 will be a stronger vintage year for Asian PE. Around 45 per cent of LPs said this for 2024.

Coller Capital also noted that 87 per cent of LPs believe the healthcare and pharmaceutical sectors are attractive for PE investments. Some 75 per cent of LPs said that the IT sector looks attractive, while 73 per cent said so for business services.

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Around 69 per cent of LPs view the renewable energy sector as attractive, and 49 per cent for hydrocarbon energy. Only 21 per cent of LPs view the consumer sector as an attractive opportunity for PE investment.

About 80 per cent of LPs predict good investment opportunities for GPs in mid-market, lower mid-market and special situation funds in the next two years. Some 77 per cent of LPs expect good opportunities in secondaries.

Notably, only 58 per cent of LPs see attractive opportunities for growth or expansion capital. This marks a significant drop from 90 per cent in the Winter 2017 to 2018 survey, where it was second-most favoured by LPs, after lower mid-market.

Fewer LPs said large and mega buyouts are good investment opportunities. LPs are concerned about the level of debt in buyout deals, with half believing the current proportion is too high, the report showed.

Across their portfolios, LPs are posting record levels of returns, with two in five LPs reporting net annual returns of over 16 per cent across the lifetime of their private-equity portfolios.

Performance differs across strategy types, particularly between buy-and-build investments and investments focused more on organic growth, with two-thirds of LPs stating that their buy-and-build portfolios have outperformed. 

“Being selective and choosing the right strategies and sectors to invest in will be key,” said Coller Capital chief investment officer Jeremy Coller.

In addition, more than 60 per cent of LPs expect the best PE investment opportunities to come from families, entrepreneurs and corporations over the next two years.

The report showed interest in artificial intelligence, with LPs saying it could be a useful tool for originating deal flow, deal assessment or post-transaction portfolio company engagement.

As for environmental, social and governance (ESG) investment, European investors take the lead with three in four LPs having dedicated ESG personnel. They are followed by nearly two in five Apac LPs.

Coller Capital surveyed 110 investors of private-market funds. These investors were based in North America, Europe, and the Apac region (including the Middle East). Fieldwork for the barometer was done from Feb 3 to Mar 31.