Valuations of portfolio companies are a top concern among 60 per cent of private equity investors and their consultants this year. Dry powder was the No 2 top concern, with 40 per cent of this group citing it as among their top concerns for the industry this year.
Both results are up substantially from 2017, when 48 per cent of investors and consultants cited valuations and 26 per cent cited dry powder as their top concerns.
These and other important findings on private markets trends are uncovered in the 2018 eVestment Private Markets Due Diligence Survey. For the report, now in its third year, eVestment surveyed investors and consultants around the world and for the first time also surveyed private markets fund managers to gain their insights on the market.
One interesting contrast to the investor and consultant findings is that while valuations and dry powder also topped the list of fund managers’ concerns, the proportion of respondents that noted them as such was lower than investors and consultants, at only 38 per cent and 19 per cent respectively. This perhaps illustrates fund managers’ confidence in their ability to maximise returns through hands-on operational improvements, rather than relying on market timing.
The report also sheds light on the use of credit facilities by fund managers, a practice that is hotly debated within the industry. Of the fund managers surveyed, nearly two-thirds reported the use of credit facilities with over a third of this group having facilities in place of between two and five years. Despite credit facilities gaining negative media coverage, investor and consultant respondents were in fact largely neutral on the use of them by managers: only 23 per cent view them negatively and coincidentally the same percentage viewed them positively.
Among investors and consultants, 21 per cent expect to increase their allocations to private equity this year, while only 16 per cent expect to decrease their allocations to private equity. Firms in the private equity real estate space might face headwinds in 2018 as only 7 per cent of investor and consultant respondents expect to increase allocations to this strategy while 14 per cent expect to decrease allocations.
Investors and consultants still face challenges in being able to compare the performance of one fund manager to another, as cited by 61 per cent of respondents. They are seeking to overcome this by leveraging deeper data: 78 per cent of fund managers reported that investors and consultants were requesting more granular data this year compared to previous years and 74 per cent of investors and consultants stated that they always or often recalculate fund performance numbers.
Investors and consultants spend significant time performing due diligence on fund managers – 21 days for a manager with which they already have a relationship and 40 days for a new manager. This highlights how a consistent way to share and assess data, such as eVestment’s TopQ solution, could ease the due diligence process for everyone in the industry.
ESG considerations were noted as extremely or very important by 46 per cent of investor and consultant survey respondents in the Europe, Middle East and Africa (EMEA) region, while only 18 per cent of investor and consultant respondents in the Americas rated ESG as extremely or very important.
“As private markets firms and funds become larger and more influential and institutional investors continue to increase their exposure to this asset class, this survey provides a unique perspective on the challenges and opportunities investors, consultants and fund managers face,” says Graeme Faulds (pictured), eVestment director private markets product. “The rigor institutional investors are exerting in the due diligence process in the private markets space, even during a time of unprecedented demand, is undeniable and it’s interesting to see how investors, consultants and managers are adapting and the tools and solutions they are adopting as this evolution continues.”
Investor and consultant survey respondents had institutional assets under management/administration of more than USD4.3 trillion and their aggregated private markets assets under management/administration totalled more than USD584 billion.
