New research released Monday by the Private Equity Growth Capital Council shows an interplay of factors that will influence private equity activity over the next 12 months.

These include the current high-valuation landscape, the effects of an increased regulatory environment and the divergence of investment strategies in the private equity sector.

“These are [among] the key trends that will shape the dynamics impacting private equity investment in 2016,” PEGCC vice president of public affairs James Maloney said in a statement.

“We polled top executives at both larger firms and smaller firms about their expectations, and these insights gave us a strong sense of where the industry is heading.”

The report was based on a study EY conducted in the fourth quarter among 26 unique firms, representing assets under management of some $276 billion. For purposes of the report, researchers considered firms with less than $20 billion under management as “smaller,” and those with $20 billion of more “larger.”

 Following are the top 10 private equity trends for 2016, according to PEGCC:

Challenging Investment Environment 

1. Challenging Investment Environment

Seventy-three percent of larger firms and 32% of smaller ones said finding investment opportunities was their most significant challenge. Regulatory/legislative challenges and valuations were bigger priorities for smaller firms.

Valuations Will Remain High

2. Valuations Will Remain High

Both larger and smaller firms agreed that purchase multiples would most likely stay the same (52% of larger firms, 45% of smaller ones) or fall (larger firms 38%, smaller ones 45%) in 2016.

PEGCC said that although public market volatility would influence purchase valuations, it expected them to remain historically high.

Increased Equity Contributions

3. Increased Equity Contributions

Fifty-seven percent of respondents expected equity contributions to stay the same in the next 12 months, and 40% expected them to rise.

Divergence of Investment Strategies

4. Divergence of Investment Strategies

Seventy-three percent of larger firms said they were considering more involvement in credit/distressed investments in 2016, compared with 33% of smaller firms. Larger firms are also planning significantly more involvement in real estate (64%), hedge funds (27%), fund to funds (18%) or retail and high-net-worth focused funds (18%).

In contrast, 48% of smaller firms had no plan to increase their involvement in any of those investment strategies.

Fifty-nine percent of smaller firms reported an industry specialization — including energy, health care, business services, software and technology, automotive and operating talent — compared with 30% of their larger counterparts.

Regulatory Guidance

5. Regulatory Guidance

Fifty-eight percent of responding firms said they had not been affected by regulatory guidance on leveraged lending over the past 12 months. However, big majorities of both larger and smaller firms agreed that if U.S. regulatory guidance had impacted their ability to secure financing, it had had a negative effect.

Adjusting to New Regulations

6. Adjusting to New Regulations

No larger firms reported that they had hired a compliance consulting firm, compared with two-thirds of smaller firms. Only 44% of larger firms said they had formalized compliance policies or hired a chief compliance officer (likely, PEGCC said, because they already had such policies and positions in place), compared with 86% of smaller firms.

Nearly all firms said they had added more people as a result of the Dodd-Frank Act.

Increase in Co-investments

7. Increase in Co-investments

A majority of all respondents expected limited partner participation in co-investment opportunities to increase over the next 12 months. No respondents of any size expected LP participation to decrease.

Smaller Firms Compete for Dollars

8. Smaller Firms Compete for Dollars

Thirty-three percent of smaller firms expressed concern about fundraising, with 10% expecting fundraising efforts to be significantly more difficult in the coming year than it was last year.

By contrast, 27% of larger firms thought fundraising efforts would be somewhat easier in 2016. Half of respondents expected to see no change in the difficulty of raising funds in the next 12 months.

Exit Volume Plateaus

9. Exit Volume Plateaus

Seventy-eight percent of respondents said they expected exit activity to either stay the same or decrease over the next 12 months. Nearly three-quarters said sales to corporates was the most attractive exit route.

Only 20% of larger firms and just 5% of smaller ones put their hopes on an initial public offering.

Job and Wage Growth in Portfolio Companies

10. Job and Wage Growth in Portfolio Companies

Some two-thirds of respondents said they expected wage growth to stay the same at portfolio companies over the next 12 months. Among those who thought average wage growth to rise during that period, half expected an increase between 2% and 3%.

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