LPs weigh their options in light of macro challenges

After a strong performance in 2022, investors are assessing their PE allocations as they balance the need for returns and liquidity.

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Over half (53 percent) of respondents to Private Equity International’s LP Perspectives 2023 Study report that the asset class exceeded performance benchmarks over the past 12 months, a slight dip from the 59 percent who said so in the prior year.

More than a third indicate their private equity portfolio has met benchmark expectations, roughly in line with the last three years. However, over the past year, more respondents – 13 percent compared with 5 percent in the 2022 study – say PE performance fell below expectations.

This may be a reflection of a highly volatile year for public markets, as well as a more challenging macro environment, marked by high inflation and rising interest rates.

Looking at the next 12 months, there are more investors that anticipate lower returns for PE than there were before. Around a quarter expect their PE portfolios will fall below benchmarks over the next year, up from just 8 percent in the 2022 study. Meanwhile, the proportion of LP respondents that expect the asset class to exceed benchmarks has fallen from 36 percent to 25 percent.

In a panel at the British Private Equity and Venture Capital Summit in October, Joana Rocha Scaff, head of European private equity at Neuberger Berman, pointed out that the asset class is a highly competitive industry, in which success breeds success. That said, LPs are also more discerning, and not only tracking performance via a fund’s internal rate of return, she noted.

“We look at money on investment capital,” Rocha Scaff said. “We look at cash back to LPs… And, more and more, we’re also increasingly looking not just at returns per se, but how that return was created – [through] earnings growth, leverage reduction, multiple arbitrage, [as well as] with a bunch of ESG KPIs.

“We’re increasingly looking not just at returns per se, but how that return was created”

Joana Rocha Scaff
Neuberger Berman

“There was a period of time in the industry [during which] you just put leverage into the companies, and you bought cheap and sold high, and that drove the returns. I cannot possibly believe that many of you buy things very cheap in 2022, 2021 or in recent years. So, the majority of that value creation in our industry has come… or, at least, is underwritten to come, from operational value creation that’s largely driven by growth.”

In the absolute sense, PE is still looking strong, a London-based partner at a global fund of funds, told PEI. “Most PE investors are in a luxurious position of not having to worry about the next quarter results for one or two companies. While there might be some weaker results in some quarters… as long as the long-term thesis is intact, it’s not a problem.

“As long as we deliver returns consistently – in our case, high teens net returns at the portfolio level – clients will be happy,” the partner said. “Clients are looking for us to steer the ship with a steady hand. And that’s certainly what we’re doing.”

Allocation issues

Nearly a quarter of respondents to this year’s Perspectives study say they are overallocated to the asset class. Many state pension systems in North America, including the Oregon Investment Council, Kansas Public Employees Retirement System and Maine Public Employees Retirement System, are contending with overexposure to PE as well as lower distributions as a consequence of slower dealmaking in a highly uncertain environment. Such pension funds are among LPs globally that are considering their options, from consolidating capital with their highest-conviction managers, to trimming GP relationships and capital commitments or evaluating their 2023 pacing plans.

“While there might be some weaker results in some quarters… as long as the long-term thesis is intact, it’s not a problem”

Partner at a fund of funds

This is already reflected in the latest Perspectives data, which shows a decline among LPs expecting to invest more capital in the asset class over the next 12 months – from 46 percent in last year’s survey to 28 percent this year. Reassuringly, some 51 percent of LP respondents expect to retain their aggregate investment amount to PE over the year ahead.

Yet moves to commit more capital to PE are also underway. DGB Life Insurance, a Korean institution with 8 trillion won ($5.9 billion; €5.8 billion) of assets, will target PE and private debt in a bid to nearly double its alternatives exposure.


Percentage by which investors expect the proportion of their total AUM allocated to private markets to grow in five years’ time, on average

The California Public Employees’ Retirement System was set to discuss hiking the commitment limits that staff can make to PE, co-investments and secondaries without board approval at its November investment committee meeting. Abu Dhabi Investment Authority also wants more of the asset class and is set to increase its allocation range to PE yet again, this time to between 7 percent and 12 percent. Its prior annual range had been raised to between 5 percent and 10 percent.