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On the minds of LPs

Investors are recognising that as the end of the current market cycle nears, it’s more important than ever for GPs to maintain discipline in their investments.

With record dry powder in the private equity industry and near-record purchase price multiples, investors are keeping close eye on fund managers' plans to deploy capital in 2017 – concerned that the discipline seen in 2016 may disappear.

“The biggest challenge for GPs in 2017 will be to find attractively-priced deals in today's environment with high geopolitical and economic uncertainty, high asset prices and low growth,” said Jan Radberg, head of private equity at Swedish pension fund AP1.

In 2016, limited partners such as the Florida State Board of Administration were surprised at how much self-control GPs exercised despite the pressure to put money to work in a strong fundraising environment.

“In general, GPs have shown discipline when making new investments, evidenced by lower-than-expected deal volume and increasing amounts of dry powder in the industry,” Ash Williams, chief investment officer at Florida SBA, told Private Equity International .

“GP behavior seems to indicate a belief that we are near the end of the current market cycle.”

That sentiment was echoed by other LPs, who admitted that the potential for lower private equity returns going forward is one of the main issues keeping them up at night. 

For example, Neil Randall, senior director of private equity at Teacher Retirement System of Texas, said that one of the biggest challenges for 2017 will focus on “underwriting new investments and understanding that some kind of economic pullback is very likely in the first three year of a hold period”.

Williams also said that one of the biggest challenges for GPs in 2017 will be to maintain a good pace of investments. “Do GPs eventually succumb to the 'lower for longer' [low growth, low interest rates] train of thinking and begin to rationalise paying record purchase price multiples for new investments? Does this come at the exact wrong time?”

One constant in 2017 is the fact that the US will remain the market of choice for many LPs investing in private equity.

“From a private equity fund perspective, we continue to favour the US where the markets are deep and the ecosystem is supportive,” said Robert Coke, the head of absolute return and buyout investments at The Wellcome Trust. “We will be looking for sector specific managers there.”

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