Two thirds of private equity investors (LPs) will have little or no "headroom" for new fund commitments by this time next year, according to Coller Capital's latest Global Private Equity Barometer. North American LPs will be particularly stretched - 28% of them expect to be over their allocations by December 2009.

Yet investor commitment to private equity as an asset class has not wavered. The vast majority of LPs (97%) will maintain or increase their allocations to private equity, and 40% of LPs plan an increased allocation - a proportion unchanged since the boom years. Neither have investors' return expectations for the medium term changed - 43% of LPs still expect net annual returns of 16%+ over the next 3-5 years. The problem for investors is not appetite, but stretched allocations and a shortage of cash.

Commenting on the Barometer's findings, Jeremy Coller, CIO of Coller Capital, said: "With their portfolios suffering from both the denominator effect and the distributions drought, LPs have three options: to increase their allocations to private equity, to cut their commitments, or to seek liquidity through secondaries. In practice, even LPs without allocation or liquidity problems will seek to access the secondaries market, because many will want to re-shape their portfolios to reflect new economic realities."

A "flight to quality" in terms of GP selection is already visible in LP behaviour - especially in the US, where 4 out of 5 private equity investors have refused to "re-up" with some of their GPs over the last 12 months. In the year to come, investors will be still more unforgiving in scrutinising re-up requests: they cite poor performance from a GP's current fund, investment style drift and disruption within a GP team as the factors that will most discourage them from re-investing.

The globalisation of private equity

Financial and economic difficulties will not slow the globalisation of private equity, the Barometer reveals. The proportion of North American LPs with 6% or more of their private equity exposure in the Asia-Pacific will grow to almost 70% within three years, from 41% today. For European LPs the story is similar - around one third have an Asia-Pacific exposure of 6%+ today, and this will rise to approaching two thirds of European LPs within three years.

Jonathan Gutstein, a partner at Coller Capital, said, "Despite the current economic challenges, investors have a long-term positive view of private equity and plan to increase their allocations to the asset class. Further, the globalization of private equity is not slowing: over the next several years, more North American LPs will shift more of their capital to private equity's newer markets, especially the Asia Pacific region. This shift will have important fund-raising implications for North American GPs in the future."

India and China will continue to be the most attractive markets in the Asia-Pacific, followed by the developed economies of Japan and Australia. However, investors recognise a paradox in their collective hunger for Asia-Pacific private equity: over three quarters believe the ready availability of capital is making it too easy for weak GPs to raise funds in the region.

Investment in private equity funds targeting the Middle East will also grow. Despite perceiving significant barriers to investment in the region, 20-30% of LPs plan to dip their toes in Middle East private equity over the next three years. A negligible proportion have commitments there today.

Other topics covered in this edition of the Barometer include:

- The expected performance of buyout investments and funds
- LPs' motivations for selling in the secondaries market
- The pace of GP investment in 2009
- Attractive areas for GP investment