BENGALURU : Limited partners in the Asia-Pacific region are more optimistic about their venture capital portfolios over the next one year compared to those investing in the North America or Europe, as the West struggles with macroeconomic headwinds and higher interest rates.
LPs who have invested in the APAC region expect fewer down rounds of startups they have stakes in, compared to their peers invested in the US and Europe, showed a report by London-based private equity firm Coller Capital.
About 85% of North American LPs expect their VC portfolios to see a down round, while among European LPs, 72% expect a reduction in valuation of firms in their investment portfolios. As for APAC LPs, 59% expect decline in valuations, indicating that even as LPs across key regions expect valuations to be hit going forward, those in Europe or North America see a greater impact of the overall macroeconomic downturn on their investments.
The report also noted that with the weakness in business operations, about two-fifths of LPs across the board expect their general partners to draw down less money over the next two years.
While the report didn’t specify why investors expect weakness in drawdowns, it points to the anticipation of weaker deal flows going ahead. Among European investors, 40% expect less drawdowns by GPs, followed by 38% of North American LPs. Among Asia-Pacific LPs, 35% of the total surveyed expect less withdrawals by their GPs.
However, there is optimism among LPs as more than 57% view 2023 and 2024 solid vintage years for the growth of North American private equity play, while more than half expect a stronger outcome for Europeans LPs in these two years, the report showed. Investors’ views are more balanced on the outlook for private equity in Asia-Pacific.
“Markets have been going through a long, challenging winter; so, it’s good to see that investors are upbeat on the outlook for private capital and see signs of spring ahead,” Jeremy Coller, chief investment officer, Coller Capital, said.
However, in view of the ongoing economic downturn and increasing cases of compliance lapses among startups, the report showed that LPs across regions have raised their due diligence on potential fund investments compared to the last two years.
While nearly half of North American LPs have raised their levels of due diligence, the tightening of this process has seen the steepest rise among European LPs as 72% of the total surveyed said they increased their level of due diligence on new investments.
Similarly, European LPs, along with tighter due diligence, also led among global peers in terms of hiring professionals who are dedicated towards examining the adherence to ESG (environmental, social and governance) norms within their organizations.
“The importance of ESG within private equity is still being taken seriously by LPs, despite the ‘Anti-ESG’ movement in the US,” the report noted.
About 75% of European investors already have dedicated ESG professionals, followed by 38% in the APAC region. North American LPs, however, lag, as only 21% of the total surveyed have hired such personnel.
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Updated: 15 Jun 2023, 12:47 AM IST