LPs Warm to Private Equity, Especially Mid-Market Buyouts, Distressed Equity and Venture Capital

LPs appears to be warming to private equity, in particular mid-market buyouts, distressed equity and venture capital. At least they were prior to the August financial shock.

Almost two-thirds of LPs said they committed new money to the PE asset class in the first half of the year, a pace that is ahead of the roughly 50% who did in 2010, according to a survey by Preqin. Another 57% expect to put capital to work before the end of the year.

This is according to a study of 100 institutional investors conducted by Preqin in June and released today. Whether the limited partners will carry through on their plans in the face of mounting economic uncertainty and the European sovereign debt crisis remains to be seen.

The survey is heartening for firms out trying to raise a new fund, such as Foundation Capital. Nearly half of LPs polled said they planned to deploy more money this year than they did in 2010.

So where does the limited partner community see the greatest opportunity? The answer, according to the survey, is in small- and mid-market buyout funds. Forty-nine percent rated them at the top of their lists. Next in line are distressed private equity funds (selected by 23% of LPs), followed by venture capital funds (picked by 22%).

Emerging markets also drew considerable interest. Slightly more than three-quarters of limited partners are considering investing in emerging markets, with top locations including China, India and Brazil. (See the chart below for detail.)

While LPs plan to put more money to work this year, they are still cautious about newbie funds. Nearly half said they wouldn’t invest in a first-time fund in the next 12 months and only 19% said they are open to a new team.

Given the wild nature of today’s financial markets, Preqin’s encouraging survey can hardly be seen as a compass for the remainder of the year. As it is, fundraising, at least in venture, hasn’t been a firestorm. Through the second quarter, venture firms raised just $10 billion, or less than half of the nearly $26 billion collected in 2008, according to the National Venture Capital Association and Thomson Reuters (publisher of peHUB).

(Note: The Preqin survey is not yet available on Preqin’s website.)