Investors just can’t get enough

Limited partners remain fully committed to the asset class, despite clouds on the horizon.

Fundraising hit record levels this year, so it should come as no surprise that limited partners are still keen on private equity. Those of you who have had the chance to look over the results of Private Equity International’s annual LP Perspectives survey will see 88 percent of respondents plan to maintain or increase their allocation to the asset class over the next year, while 46 percent intend to recommit to existing managers and 36 percent to form new fund relationships.

Here are five more key takeaways from our survey, which gets to the heart of what matters most to investors.

1. LPs are worried about valuations

Extreme market valuations topped the list of macroeconomic concerns across all three regions: the US, Europe and Asia-Pacific.

And the numbers show they are right to be worried. In the first half of the year valuations in US private equity transactions as a multiple of EBITDA hit new highs at 13.7x, according to a report from valuation firm Murray Devine, while in Europe the average in 2017 for transactions above €100 million is 11.2x, according to a report from CMBOR at Imperial College Business School, sponsored by Equistone Partners Europe and Investec Specialist Bank.

“Leverage and pricing in the US middle market are at an all-time high”, Joncarlo Mark, founder of the Upwelling Capital Group and a former senior portfolio manager at the California Public Employees’ Retirement System, told PEI.

Pitichai Yungtawesak, director, private equities at the Government Pension Fund of Thailand, listed high valuations and prices being driven up by dry powder as his main issue of concern.

“I’m sceptical on where we are in the private market cycle,” he said.

2. It’s becoming harder to find good investment opportunities

Few LPs like to admit to access issues, but with funds raising faster – and the number of private placement memoranda coming through the door increasing – it can be tough to do diligence on and get into the best funds. Just over 30 percent of LP respondents said sourcing investment opportunities in the past 12 months was harder than in the previous 12-month period.

“The RFP process is getting more competitive as too many GPs are participating,” Dong Hun Jang, chief investment officer of South Korea’s Public Officials Benefit Association said.

3. Private equity returns are still going strong…

Just over half of LP respondents’ private equity investments performed as expected against internal benchmarks over the past year, while 32 percent outperformed and just 16 percent underperformed. It was an even more encouraging story for Asia-Pacific LPs: none reported that their investments fell short of expectations.

4. …but LPs don’t have such high hopes for the next 12 months

Globally, 29 percent of LP respondents are less confident about private equity returns in the next 12 months, while 19 percent are more confident. In North America, the unease is greater: 39 percent are less confident, while just 8 percent feel the opposite. Again, Asia-Pacific investors are the optimists of the bunch, with none admitting to feeling less confident about investment performance over the next 12 months.

5. Investors are enthusiastic about distressed

When it comes to strategies, the one causing the most excitement among LPs is distressed debt: 20 percent intend to increase their target allocation, more than any other strategy, while just 6 percent intend to decrease it. Private equity managers have been stockpiling capital for distressed debt in preparation for the next market downturn. Contrary to North America and Europe, the hottest strategy among Asia-Pacific investors is venture capital, with a whopping 33 percent planning to increase their target allocation.

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