Twelve months ago, high market valuations were the main concern weighing on the minds of limited partners in North America in Private Equity International’s annual Perspectives survey.
Despite valuations staying elevated throughout 2016, this clearly hasn’t disheartened North American investors. Perspectives 2017 finds the overwhelming majority of investors in North America satisfied by the fact their private equity portfolio performed in line or better than they had expected.
According to the latest PEI survey, more than 43 percent of North American LPs saw their private equity investments perform as expected, while 40 percent said they performed better than expected.
This came despite a strong year in the financial markets marked by bouts of financial market volatility surounding Chinese growth, continued pressure on energy prices and the UK voting to exit the European Union. The survey was conducted prior to Donald Trump’s unexpected election as the 45th US president.
Looking forward, LPs appear more concerned about the current interest rate environment and the prospects of a global economic slowdown over the next 12 months, although extreme market valuations continue to create anxiety among investors.
With that in mind, a majority of LPs, or 52 percent, expect performance for the next 12 months will be about the same as last year, but nearly a third, or 31 percent, said they are less confident about returns in the next year.
Despite projections for lower returns by some, LPs said they will continue to flock to the asset class amid low interest rates. A large portion, or 40 percent of those surveyed, said they are currently under allocated to private equity, while 30 percent of LPs plans to increase their target allocation. Meanwhile, 30 percent have said they are currently at target allocation, and nearly 45 percent said they plan on keeping their target allocation unchanged.
First-time funds are popular with North American investors seeking diversification in their portfolios. Asked whether they plan to invest in first-time funds, 60 percent of North American LPs responded positively, with most of them investing opportunistically in debut funds.
In Western Europe, the trend is similar, with the majority of respondents, or 62 percent, also saying that they invest opportunistically in first-time funds. In emerging markets, the majority, or 64 percent, said they don’t invest in first-time funds at all.
Co-investments continue to attract investors looking to boost returns and to lower fees at the same time.
More than half, or 60 percent of North American LPs, said they plan to increase co-investments in the next 12 months, compared with 47 percent of Western European LPs and 27 percent LPs from emerging markets. Only 10 percent of North American LPs plan to maintain their co-investment level, while a surprising 30 percent of them said they have no co-investment activity.