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Private equity fund managers see valuations and fundraising as biggest challenges in 2016

Extracts from the 2016 Preqin Global Private Equity and Venture Capital Report find that pricing for investment opportunities is seen as the biggest challenge facing fund managers in 2016, according to 40 per cent of survey respondents.

North America-based managers are particularly concerned with valuations; 54 per cent cite it as a key challenge in 2016. With strong fundraising activity through 2015 and a record USD435 billion in dry powder available at the end of the year, North America-based managers have a lot of capital with which to compete for private equity assets. Overall, 38 per cent of managers surveyed think it is more difficult to find attractive investment opportunities compared to a year ago, although 51 per cent think that the difficulty remains unchanged.
The biggest concern among private equity managers based in Asia and the Rest of World is fundraising, cited by 54 per cent and 57 per cent of respondents respectively. Two-thirds of surveyed fund managers globally report an increase in competition for investor capital compared to a year ago, while only 3 per cent feel there is less. Despite this, 59 per cent of respondents either have a fund in market as of Q4 2015, or plan to launch a new offering in 2016.
Despite valuation concerns, the majority (60 per cent) of surveyed fund managers expect to deploy more capital in 2016 compared to 2015. Just 10 per cent of managers say they expect to deploy less capital in the year ahead. 

Fund managers report a net increase in appetite over the past year from each investor type. In particular, over half (56 per cent) of fund managers report an increase in appetite from family offices, the largest proportion of any investor type. 

Alternative methods for investors to access the private equity market are set to become more common among fund managers in 2016. Thirty-four per cent of fund managers plan to offer more separate account opportunities in 2016, while only 5 per cent plan to offer fewer. 

Despite the AIFMD legislation affecting marketing options to Europe-based investors, 41 per cent of North America-based fund managers said they will be targeting investors in the region in 2016. 

Fifteen per cent of fund managers believe that regulation will improve the private equity landscape in 2016, while 39 per cent think it will change it for the worse. The largest proportion (45 per cent) does not believe incoming regulation will change the landscape.

“Rising valuations, and the impact they may have on returns, are clearly at the forefront of the minds of many fund managers going into 2016,” says Christopher Elvin, Head of Private Equity Products at Preqin. “Strong fundraising over recent years means that managers currently have a large amount of dry powder available to be deployed into private equity assets. With strong competition for assets, particularly in the developed markets of North America and Europe, valuations look set to continue to be a concern through the year ahead.

“Outside the developed markets of Europe and North America, there is concern among managers that fundraising will present a challenge in 2016. Competition for investment opportunities may be less fierce, but with ongoing volatility in many Asian markets and perceived weakness in many emerging economies, fund managers focused on these regions will have to find innovative ways to attract investors.” 

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