Private equity investors’ total exposure to funds-of-funds will fall over the next three years, but 81% plan to add new private equity relationships over the next two to three years, Coller Capital’s latest Global Private Equity Barometer has revealed.

It’s twice yearly barometer of the plans and opinions of institutional investors in private equity found high costs were cited by half of investors planning a reduced funds-of-funds exposure, with disappointing returns cited by one third (36%).

Confidence in private equity as an asset class remains strong though with one third of private equity investors planning an increase in their target allocation over the next year (compared with 16% planning a reduced target); and 60% are planning to increase their volume of new fund commitments in 2011. In many cases, though, the increase in 2011 (over 2010) will be modest.

Commenting on the barometer's findings, Jeremy Coller, CIO of Coller Capital, said: “Plans to reduce exposure to funds-of-funds illustrate two important industry dynamics: the continuing growth in investors’ skills and confidence – enabling more private equity investors to commit directly to private equity funds they like – and the more demanding nature of private equity investors as a group.

“There will certainly continue to be investor demand for funds-of-funds in the private equity industry, but firms that cannot demonstrate a good track record and strong value-add will increasingly fall by the wayside.”

Half of corporate and public pension funds (50% and 47% respectively) also believed they could improve their returns from private equity if they were allowed to take on more investment staff.

Two-thirds (64%) of European private equity investors say environmental, social and governance (ESG) considerations materially impact their fund selection process (with 19% of them having investment mandates directly restricted by ESG issues), compared with only one-fifth of North American private equity investors and one-quarter of Asia-Pacific investors.

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