Investors expect private equity and venture capital near-term performance to face strong headwinds in the second half of the year, according to Preqin’s H2 2022 Investor Outlook report, with 50% and 55% of survey respondents expecting worse performance over the next 12 months, respectively.
Venture capital valuations are of most concern, with 80% of investors viewing the asset class as overvalued. As markets come under pressure, the highest risk asset classes such as private equity and venture capital are expected to be impacted the most. The recent summer rally in stock markets may provide some relief, but it remains to be seen if it constitutes a structural change in direction.
Concerns over deteriorating economic conditions are counterbalanced by optimism that we are reaching a bottom low point in the equity market. Preqin analysts found that 55% of survey respondents believe that we are reaching this stage of the market cycle in equities.
Only 30% of private equity and 26% of venture capital investors plan to increase the pace of capital deployment in the next 12 months. This represents, respectively, a 13 and 17 percentage-point decline compared to the same survey last year. By contrast, 24% and 13% of investors plan lower commitments of capital – with the remainder looking maintain their current pace of investment. Investors are now firmly in risk-off mode.
According to the Q2 2022 survey responses, allocations to hedge funds are likely to increase, while higher-risk venture capital and private equity allocations are likely to suffer. In particular, Preqin expects macro, CTAs and relative value hedge funds to attract more flows. This is consistent with expectations of a softer fundraising environment for private equity and venture capital (PEVC) in the second half of the year.
The share of investors planning developed market allocations only was 52.8% for private debt, 40.8% for venture capital, and 34.8% for private equity. This represented a 15.2 percentage-point, 16.3 percentage-point, and 6.6 percentage-point increase compared with June 2021, respectively.
The strong dollar poses a significant risk to the global economy. Emerging market assets have traditionally suffered during times when the dollar is strong, in part due to the additional strain that USD-denominated debt places on balance sheets.
