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.
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.