A survey of private equity investors has found that 30 per cent feel their investments have exceeded their expectations over the past year, up from 17 per cent that felt that way in December 2014.
Only 6 per cent of investors surveyed as part of Preqin’s 2016 Global Private Equity and Venture Capital Report reported that their investments had fallen short of expectations in 2015. A record USD475 billion was distributed from private equity funds in 2014, and a further USD189 billion was returned to investors in H1 2015. This means many investors will need to reinvest more capital to maintain their allocations to the asset class, and over half (51 per cent) of investors anticipate making new private equity commitments in H1 2016.
However, with total private equity dry powder standing at USD696 billion as of the end of 2015, the increase in the amount of capital being made available for investment has raised concerns over the valuation of assets. Seventy percent of surveyed investors stated that valuations were the biggest challenge facing them in 2016. This was echoed by 40 per cent of surveyed fund managers, while 38 per cent say that it is already more difficult to find attractive investment opportunities now compared to a year ago.
According to the report, the total size of the private capital industry reached USD4.2 trillion as of June 2015, up from USD4.0 trillion in December 2014. Private equity fund strategies accounted for USD2.4 trillion of this total.
Forty per cent of surveyed investors said they expected their private equity portfolios to outperform public markets by over 4 per cent, up from 37 per cent at the end of 2014. However, this is still below the 54 per cent that said the same in 2012, the most recent high.
A majority of investors (71 per cent) cited North America as offering the best opportunities in 2016, up from 60 per cent a year ago. Within emerging markets Asia, China and India were all seen as favourable by over 40 per cent of private equity investors.
The proportion of investors which are currently above their target private equity allocation has fallen from 19 per cent at the end of 2014 to 8 per cent in 2015. The proportion below their target allocation has stayed level at 45 per cent.
The largest proportion of investors (73 per cent) will be seeking to invest in small to mid-market buyout funds in 2016. Large to mega buyouts, venture capital and growth funds are also highly sought after by private equity investors.
“Private equity has been the best performing part of many investors’ portfolios over recent years, delivering superior returns compared to all other asset classes over the longer term,” says Christopher Elvin (pictured), Head of Private Equity Products at Preqin. “The record levels of distributions seen in 2014 and H1 2015 will further help to keep investor sentiment positive, and many investors have indicated that they are preparing to allocate more capital to the asset class in the year ahead.
“While fundraising should remain strong due to investor demand, the challenge of identifying the best investment opportunities remains for investors. With concerns rising over valuations, investors will be looking to commit to managers with a proven track record of finding attractive opportunities.”
