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The Year in Alternative Investments: What Happened; What's Coming

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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.

Hedge Funds

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.

HFR’s research shows that total hedge fund industry capital has increased to a record just $21 billion shy of a $3 trillion, while the total number of hedge funds, including funds of funds, has declined to 9,925, the first drop below 10,000 since 2014. “The total number of hedge funds has declined from its peak in Q3 2015, even as industry capital has risen to record levels, with a large component of the recent consolidation occurring within the fund-of-hedge-funds space,” HFR president Kenneth Heinz said in a statement.

“Over the last year, as total industry capital increased by 3.4%, the number of single-manager hedge funds declined 2.5%, while the number of FOFs fell by 6.6%.”

The HFRI Fund Weighted Composite Index gained 3% in third quarter, contributing to a year-to-date 4.6% return through November, topping the MSCI World Index over the same period.

The HFRI Asset Weighted Composite Index recovered first-half losses by gaining 2.2% in the July-through-September period, and is now up 1.9% for the year through November.

Up Next: Micro VC Funds

In the midyear survey, 36% of investors said venture capital funds were their favorite investment vehicle.

Preqin reported on what may be a new trend: the proliferation of micro VC funds, which seek to raise $50 million or less and now account for 54% of all VC funds.

Preqin said these smaller funds are important in funding growth in global communities. As well, they satisfy investors’ impact-driven investment mandates by offering greater specialization to their portfolio companies than bigger funds typically can.

As of November, 702 micro funds were in the market, up by 40% just since June. They were raising more than $32 billion in aggregate capital, an increase of $9 billion in targeted capital.

Fifty-five percent of some 4,100 active VC investors have mandates suited to micro VC investment, Preqin said. This number includes 1,665 investors that have committed to at least one micro fund in the past.

See ThinkAdvisor’s Outlook 2017 landing page for more insights on the economy and markets for advisors in 2017.


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