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Climate Change, Healthcare Driving LP Investment Priorities

Private markets secondaries investor Coller Capital’s latest Global Private Equity Barometer says that three quarters of all LPs will invest differently in response to issues connected with sustainability and climate change, and a similar proportion will focus on new opportunities in healthcare and biotech.

“The fact that key ESG issues – climate, sustainability and health – are at the top of investor agendas should surprise no one,” said Jeremy Coller, Chief Investment Officer of Coller Capital, “but the fact that half of all private equity investors think ESG investing will in itself boost their portfolio returns should be a wake-up call to anyone who still thinks ESG is a ‘nice to have’ or a PR tool.”

According to the report, LPs believe the risks to private equity returns have risen substantially in the last 18 months. Three quarters of investors fear a worsening of geopolitical strife and trade wars, and over two thirds are apprehensive about changes in the regulatory or tax environment. Interestingly, although a third of North America’s LPs think the Biden-Harris Administration will have a negative impact on their returns, another 14% of investors think the new Administration will have a positive impact.

Despite their worries, a definite majority of Limited Partners in North America and Europe think this is a good time to be making new PE commitments. It is not necessarily an easy time, however: over half of LPs in North America especially think it has become harder recently to select the right GPs and funds.

The ‘brave new world’ of post-Covid investing is reflected, too, in a greater willingness among many LPs to change their GP partners. Two-fifths of investors say they are now more likely to refuse re-ups with their current GPs than they have been in recent years – primarily because of weaker-than-expected fund performance. Partly as a consequence, almost half of Limited Partners plan to speed up their commitments to new GP relationships over the next 18 months.

Limited Partners’ returns from private equity over their portfolios’ lifetimes are at record levels. Two thirds of LP have now achieved overall net returns of between 11% and 15% from private equity – with another fifth of LPs reporting net returns of over 16% since they started investing in the asset class. Unsurprisingly, these investors’ asset allocations to the asset class – and to alternative assets generally – are continuing to climb: a greater proportion of investors are planning to increase their allocations to alternatives than at any time since the Global Financial Crisis.

The only geographies to which investors are showing significantly more negative sentiment are the Middle East and Africa (towards which just over a quarter of LPs are more negative) and Latin America (to which over a third of LPs are more negative).

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