Private equity investors may have the luxury of a long time horizon, but even they are spooked by the prospect of sustained global trade tensions, and a rising number are worried about the potential impact of Brexit on European asset returns.
Three-quarters of limited partners – investors in private equity funds – believe international trade disputes will harm investment returns from private equity if they continue, according to Coller Capital’s latest Global Private Equity Barometer.*
Indeed, many investors are taking a cautious approach to the economy, found the survey released on Monday. Around half of LPs are modifying their investment strategies or asset allocations to ensure they are in good shape for a downturn.
That proportion rises to nearly two-thirds of Asia-Pacific investors, which accounted for 20% of the 110 LPs polled (40% were in Europe and 40% from North America).
These findings chime with a de-risking trend among asset owners globally that AsianInvestor has spoken to.
On a more positive note, Southeast Asia and Greater China are the clear preferred destinations for private equity investment beyond North America and Western Europe (see graph above).
It is perhaps not surprising that LPs are particularly worried about trade disputes, given their potential impact on the companies they invest in.
Canada’s Ontario Teachers' Pension Plan discusses with its portfolio companies and investment partners issues such as how geopolitical considerations or other risks might affect the underlying businesses in the private equity portfolio.
“For example, do we reposition our production base [as result of trade tensions and tariffs]?” Ben Chan, Asia head of the C$194 billion public fund, told AsianInvestor in late September.
“It’s more about how [macro trends] affect our corporate partners [than about our own investment strategy],” he added. “We speak to them a lot, exercising our rights as a shareholder.”
With tariff increases due to kick in on January 1 between China and the US, Presidents Donald Trump and Xi Jinping at the weekend agreed on a 90-day truce to allow for bilateral talks.
But it remains unclear what will happen after that, especially given the apparently wide gulf between the expectations of the two sides. There have been some key discrepancies between the Chinese and American announcements about what was agreed at the G20 summit in Buenos Aires.
Turning to Europe, four in 10 LPs polled by Coller believe Britain’s departure from the EU will be harmful to returns, up from one-third that held the same view three years ago.
Nearly half (44%) felt there would be no new opportunities as a result of Brexit, while a similar number (45%) said they saw the potential for acquiring UK assets cheaply down the line.
Only 17% of LPs saw opportunities from a less demanding regulatory environment, and just 13% thought private equity could benefit from better export opportunities for British companies.
When it comes to emerging markets, Asia-Pacific investors are more positive on the prospects for private equity in developing countries than their peers in Europe and North America (see graph below). In each of the latter two regions, nearly a quarter of LPs expect conditions to deteriorate, as against 14% of Asia-Pacific investors.
However, Asia by far the most popular destination outside Europe and North America, particularly emerging markets such as China, India and Southeast Asia.
Separately, it has been argued that the collapse of Dubai-based private equity firm Abraaj this year has harmed the reputation of emerging market private equity investment.
However, only a quarter of LPs in the Coller survey said they were facing or would face pushback on emerging market investments. The rest said it was viewed as an isolated incident.