A new survey of private equity fund managers finds that valuations are a growing concern, but many managers are optimistic that exit activity will increase over the coming 12 months.

Fund managers are also confident that they can put the massive amounts of dry powder to work despite challenges within the asset class.

Preqin, the alternatives data provider, surveyed 187 private equity fund managers in June to find out their views on the biggest challenges facing the industry, investor appetite for private equity, key issues and outlook for the coming year.

Challenges

Deal pricing is the biggest challenge facing the private equity industry in the year ahead, according to 48% of managers, predominantly those in traditional markets.

Fifty-eight percent of Europe-based managers and 55% of managers in North America cited valuations as the biggest challenge, compared with only 24% of those based elsewhere.

Forty-six percent of managers said they had seen pricing for portfolio companies increase over the past year, compared with 17% who had experienced a reduction.

Thirty-eight percent of respondents said current valuations had prompted them to change the targeted returns of funds they were bringing to market, with 29% reducing target returns and 9% increasing them.

However, 42% of managers maintained that targeted returns were independent of pricing in the market.

Macroeconomic conditions were cited as a key challenge by 38% of fund managers, mindful of volatility and uncertainty in global markets following from events such as Brexit and China’s economic slowdown.

A third of managers raised concerns about fundraising, 28% about tightening regulatory regimes and 27% about the exit environment.

Fundraising was the key challenge for 72% of Asia-based managers and 55% of those in other regions.

Volatility and market uncertainty were a much greater concern to managers in Europe, Asia and other regions than to those in North America.

Competition and ESG Considerations

About half of fund managers in the poll reported stronger competition for deals, compared with a year earlier, while less than a tenth had seen less competition.

A fifth of managers said increased competition had caused them to alter their strategies. For one buyout manager cited by Preqin, this meant increasing the breadth of opportunities considered; for another, it meant making larger later stage investments, which had become much cheaper.

Thirty-eight percent of respondents, including all managers with $5 billion or more in assets under management, said it was harder to find attractive investment opportunities than 12 months ago.

Forty-two percent of all managers said they were having to review more opportunities for every investment made than they did a year earlier.

The survey found that environmental, social and corporate governance factors were becoming increasingly important to both fund managers and investors.

Fifty-three percent of fund managers said they considered ESG policies for all deals, and 24% did so for some deals.

Interestingly, 31% of firms in North America said they did not consider ESG factors, compared 6% of Europe-based firms and just 2% based elsewhere.

The largest fund managers consider ESG factors for all deals, but only 45% of firms with less than $250 million under management do so. Investors’ Growing Appetite

Fund managers who participated in the survey reported higher investor appetite for private equity, with 58% saying the biggest increase had come from family offices.

Forty-one percent had seen a stronger appetite among public pensions, 38% among public sector pensions and 38% among sovereign wealth funds.

By region, 47% of managers have drawn interest from Asia-based investors, 45% from investors in North America, 40% from Europe-based ones and only 21% from investors outside those areas.

Preqin said the fundraising markets remain very competitive: At present, some 1,700 vehicles are in market.

It said attracting investors would likely continue to challenge managers, especially in regions outside North America and Europe. Eighty-two percent of respondents in those areas said competition had increased, including 39% who reported significant increases.

Despite their concerns, 44% of fund managers expected increased exit activity in the next 12 months, 34% said there would be no change and 23% said the number of exits would decrease.

In addition, two-thirds of managers expected the private equity industry’s assets under management to grow in the coming year.

Sixty-two percent of respondents said they planned to investment more capital in the year ahead compared with the previous 12 months, and 37% said they would deploy significantly more.