Private Equity’s Valuation Conundrum

Valuations are still a concern for GPs but managers expect to put more of their dry powder to work in 2016.

Private equity managers are concerned about high company valuations after struggling to deploy capital last year, according to Preqin.

Of surveyed private equity firms, 40% said they were most concerned about the prices quoted for portfolio companies. More than half (54%) of North American general partners (GPs) said this was their main concern.

Fundraising for private equity funds was strong through 2015, Preqin said, with a record $435 billion now in undeployed capital.

“With valuations cited as the largest challenge for the coming year, this suggests that private equity managers have been struggling to find the best investment opportunities at the right prices,” Preqin said in a report accompanying the survey.

More than a third (38%) of managers said they felt it was more difficult to source attractive investment opportunities compared to 12 months ago.

“Rising valuations, and the impact they may have on returns, are clearly at the forefront of the minds of many fund managers going into 2016,” said Christopher Elvin, head of private equity products at Preqin. “Strong fundraising over recent years means that managers currently have a large amount of dry powder available to be deployed into private equity assets. With strong competition for assets, particularly in the developed markets of North America and Europe, valuations look set to continue to be a concern through the year ahead.”

Despite the valuation concerns, the majority of GPs surveyed by Preqin expected to deploy more capital this year than in 2015. Investor appetite for the asset class was expected to remain strong: 66% of managers predicted a “slight” or “significant” increase in the amount of competition for investor capital this year. Family offices in particular were eager to invest more in private equity, with 56% of managers reporting an increase in appetite from this sector.

Private equity appetite. Source: Preqin

Related: Valuations Fail to Deter Private Equity Investors