Private equity managers and investors this year were focused on high entry prices for assets and how these could affect future returns, according the Preqin, the alternatives data provider.
Forty-eight percent of fund managers polled at midyear said pricing was the biggest challenge they faced in the next 12 months, and two-thirds of investors said high valuations were their top concern in operating an effective private equity program. At the same time, distributions continued to drive private equity investor satisfaction and activity, Preqin reported. In 2015, a record $443 billion was distributed from private equity vehicles, compared with $226 billion in capital calls.
Eighty-nine percent of investors said performance had met or exceeded their expectations over the preceding year, and 43% said they would commit more capital in the coming year than they had in the previous one.
In the current financial climate, half of investors saw the best opportunities in small- and midmarket buyout funds.
First-timers deliver returns comparable to those of established managers and often outperform them, according to Preqin. Indeed, in vintage years 2000 to 2012, their median net IRR exceeded that of experienced fund managers every year except 2004.
Preqin said investment in fledgling funds could enable limited partners to develop strong relationships with general partners, leading to several possible benefits:
- The ability to invest in successor funds before other investors
- Seats of LP advisory boards and committees
- An increase in co-investment opportunities
- Occasionally more flexible fund terms and conditions
During the summer, Preqin assessed how the June Brexit vote would affect private equity managers’ and investors’ portfolios and future activity.
No managers expected a positive effect on portfolio performance over the next 12 months or longer term, and just 11% thought it would have none on their U.K. investments.
Longer term, half of managers expressed uncertainty about how Brexit would affect the number of their U.K. investments. However, 30% said they were looking to invest more, compared with 20% that planned to make fewer investments.
As for investments in the rest of the EU, 43% of fund managers said they would keep the number steady, while 21% expected to invest more. None said they would make fewer investments.
New hedge fund rollouts totaled 170 in the third quarter, down by 30 in the second quarter and down from 269 in the same period last year, according to a recent Hedge Fund Research report.
Hedge fund liquidations also increased in in the third quarter, and through September totaled 782 for the year, putting liquidations on track for the highest number since the financial crisis.