Concerns around an expected decline in returns from the largest buyout funds are driving limited partners into other parts of the private equity market.
Speaking to Private Equity International on the fringes of the SuperInvestor conference in Amsterdam this week, several LPs said that high valuations on entry, a dearth of large, high-quality acquisition targets and the onerous fee burden has made investing in such funds less attractive.
“In some parts of the market the premium for illiquidity is not there anymore, I believe,” said Daniel Winther, head of private equity and infrastructure at Stockholm-headquartered Skandia Mutual Life Insurance Company.
Skandia, which has the equivalent of around €5 billion in PE assets under management, has pivoted towards general partners who focus on smaller companies and operational improvement. It has also increased its allocation to venture capital.
Funds it has committed to in recent years include TDR Capital III and Swedish VC fund Priveq Investment Fund V, according to PEI data.
One Asia-based life insurer is bypassing large buyout funds in favour of country- and sector-focused firms, its head of alternative investments told PEI. The head cited Main Capital Partners, which invests in software companies in DACH, Benelux and the Nordics, as a firm his institution admires.
Less than 2 percent of the insurer’s roughly $26 billion asset base is in private equity. It needs to show the asset class can generate strong returns in order to gain institutional support to raise its allocation, the head added.
One portfolio manager with a large European pension fund said return expectations from its bigger holdings were lower for the current generation of funds.
“Our fund portfolio runs fairly in line with the index,” the portfolio manager said. “Co-investments are where we really generate out-performance.”
Not including SoftBank’s Vision Fund, there are 29 private equity funds in market targeting the equivalent of $5 billion or more, according to PEI data. The largest is Blackstone Capital Partners VIII, which has raised $26 billion, as PEI reported in September. It is unclear whether the vehicle has held its final close.
Private equity fundraising in the first nine months of this year was $296.5 billion, its lowest level since 2015 nearly 8 percent down on the equivalent period in 2018, according to PEI‘s latest fundraising report.