LPs bearish on PE returns as competition becomes top concern

Concerns over dry powder and pricing have prompted institutional investors to expect diminished performance over the next three years.

Private equity investors are anticipating diminished returns amid growing concern over competition for assets, according to new research.

More than half (52 percent) of institutional investors and consultants expect private equity performance to decline over the next three years, according to the 2019 eVestment Private Markets Due Diligence Survey. Only 12 percent believe returns will improve.

Respondents were most bearish on private equity, though venture capital was a close second with 47 percent expecting weaker performance. Respondents were most optimistic about infrastructure, with 26 percent believing returns will improve and only 21 percent anticipating a drop.

Investors were asked about their current expectations for internal rate of return of private markets asset classes. Private equity was expected to deliver a 13 percent net internal rate of return, second only to venture capital at 14 percent, the survey found.

Almost one-third (32 percent) of investors are extremely concerned about future performance across all asset classes, with 45 percent projecting a decline in the performance of existing investments and 43 percent a decline in that of new investments.

Investors named competition for deals their biggest worry, with 41 percent very concerned about the issue and just 3 percent expressing no concern. Competition for deals was only the fourth highest concern in 2018.

Private company valuations were identified as the second biggest issue, with 38 percent of investors very concerned. As a result, 45 percent expect to increase their focus on monitoring existing investments as they seek more information on existing portfolios to better understand their risks and exposures.

Partners Group adopted a more neutral view of private equity in November as pricing and competition diminished its appeal. The Switzerland-headquartered investment firm also raised its multiple contraction assumption – the possible reduction of EBITDA multiple over the life of an investment – used in its underwriting to 1.4x for 2018, up from roughly 0.5x for investments made in 2016.

eVestment surveyed investors and consultants representing more than $765 billion in assets under management or administration and more than $131 billion in aggregated private markets AUM/AUA. Pensions accounted for 41 percent of responses, followed by family offices at 21 percent and endowments at 14 percent.