LPs eye mid-market

Limited partner interest in US mid-market funds has grown by more than 18 percent over the last five years, according to a recent investor survey from Probitas Partners.  

The survey found that 58 percent of respondents would target investments in funds operating in the US mid-market next year, compared to only 49 percent in 2007. Growth buyout and US small market buyout funds also generated strong support, with 40 percent of 126 respondents indicating they would focus their attention on those sectors. 

LP enthusiasm for mid and small market is not surprising. Several LP sources have indicated they will be moving away from commitments to large-cap funds, citing possible conflicts of interest with publicly held private equity firms and stale returns. This trend was reinforced by Probitas' survey, which found that only 7 percent and 13 percent of respondents plan to invest in mega-buyout and US large buyout funds, respectively,  

Respondents' stated preference for the US mid-market, as opposed to Europe’s, may be skewed by where the survey responses originated, according to the report. More than 40 percent of respondents were headquartered in North America, whereas only 35 percent come from Western Europe. 

European respondents favored their own mid-market by considerable margin; country-focused European mid-market funds garnered support from 76 percent of those respondents compared to 55 percent indicating plans to invest in the US mid-market. 

Within the US mid-market, 58 percent of respondents said they found funds focused on operational improvements “most appealing”. The next most popular strategy was buy-and-build, which received support from 40 percent of those surveyed. 

In addition to the mid-market, respondents also expressed a high level of interest in credit strategies because “continuing problems in the debt markets make this sector more attractive to private equity investors”, according to the report. The survey found that 26 percent of investors will focus their attention on credit strategies next year, while another 19 percent will consider mezzanine focused funds. 

Probitas found that LPs continue to show interest in China and Brazil — 38 percent and 33 percent of respondents ranked those among their top two emerging market countries, respectively. However, interest in China did fall from the previous year, when 47 percent of LPs placed it in their top two. 

The secondary market, which had around $13 billion in total deal volume during the first half of 2012, also garnered support from respondents – 41 percent of whom indicated that their organisations actively purchase direct positions on the secondary market. Another 38 percent said that they invest in secondary funds. 

“[For secondaries], this year was helped on the fundraising side by a lot of the big, long time managers raising. Just because of that I expect fundraising to ease off next year,” said Kelly DePonte of Probitas in an email.