The private equity boom of recent years is expected to slow in the coming months, according to information and data provider Preqin. Nevertheless, the firm says the asset class will continue to remain a core part of investors’ portfolios.
Preqin said in a report that while private equity fundraising has exceeded $400 billion a year annually over the past five years, high pricing is putting pressure on future returns, causing distributions to slow, which has led some managers to lower their expectations for targeted returns.
“2019 looks like it might mark the end of the unprecedented boom in fundraising we’ve seen in the past few years,” Christopher Elvin, Preqin’s head of private equity, said in a release. “The flood of capital and participants that have entered the industry have put pressure on pricing, and this has a knock-on effect on future returns that we may already be seeing emerge.”
Elvin also said that with many investors concerned about a potential market correction, as well as liquidity reducing, they are likely to “exercise caution in terms of where and with which firms they deploy their capital.”
The report said that both the fundraising and deals marketplaces are “more crowded than ever before,” which presents a significant challenge for fund managers who don’t have an established track record.
Kevin Gruber, managing director of Germany-based analytics provider AssetMetrix said in the report that investors are increasingly allocating funds to North America, Europe, and developed countries within the Asia-Pacific region. He said that “diversifying geographically allows investors to hedge against potentially uncertain economic environments.”
Gruber also said a lot of investors are active in buyout, venture capital, and distressed debt, as well as infrastructure assets within their private equity allocation. He said combining risk/return profiles and asset diversification can help de-risk portfolios.
Some of the trends cited in the report include:
- 72% of investors and 62% of fund managers cited high asset pricing as a key concern in 2019, making it the biggest issue cited by both groups.
- The industry faces unprecedented levels of competition, as a record 3,749 private equity funds are in the market at the start of 2019, collectively seeking $972 billion, which is an all-time high.
- In the 10 years to June 2018, the private equity industry has outperformed the S&P 500 index, returning 10.8% compared to 10.2% for the public market index. Additionally, 92% of investors report that their private equity investments have met or exceeded their expectations in the past 12 months.