Investors preparing for economic downturn turn to private equity
“Early 2019 represents a pivotal point in time for the alternative assets industry,” finds a report from Preqin published in April. “Having enjoyed a period of steady growth over the past decade, with total assets under management (AUM) at a record $9.44 trillion as of June 2018 (the latest data available), it is quite clear that this environment has begun to change.”
The research house surveyed more than 400 investors back in November to understand their current views on each asset class, the challenges they are facing and their plans for the next 12 months. “With asset valuations currently at record levels, fund managers and investors we spoke to largely agree that we are at the peak of the equity market cycle and are due a correction.” Fully 61 percent of investors across all asset classes believe equity markets are at a peak, up from 56 percent that said so in June. Just 21 percent say we are in an expansion phase, down from 27 percent six months prior.
PE may prove to be a silver lining. While the public markets already began showing signs of weakening in late 2018, Preqin points out that “alternative assets weathered the storm of the last recession well.” As asset classes go, private equity is perceived as a safer haven in bad economic times.
PE firms are likely to see increasing interest from investors who are preparing for a downturn, according to the survey. “Private equity is clearly delivering for institutional investors, providing strong returns that are meeting and often exceeding expectations,” says the report. “Investors remain committed to private equity, and the outlook for 2019 is positive.”
Investors say they expect to be highly active in private equity moving forward: “almost a third (31 percent) are planning to commit more capital than they did in 2018 and a further 57 percent are planning to commit roughly the same amount.” High absolute returns are one of the primary reasons why investors surveyed say they allocate to the asset class.
There were some caution signs in the report. “Net cash flow was negative in 2017 and, although still strong, fundraising slowed during 2018 in comparison to the record levels of 2017 as investors reduced the pace of new commitments. Pricing is at a record level and the majority of investors feel that this will be the key threat to return generation in the next 12 months.”
Although many survey respondents were wary that future private equity returns may be eroded, they still expressed confidence that the asset class can meet their portfolio objectives over the coming year: 68 percent are just as confident that private equity will deliver in 2019 as they were in 2018, while 15 percent have even more confidence in the asset class.
Preqin released its Q1 fundraising update on April 10. "Historically, the first quarter of the year is a quieter period for fundraising; this was certainly the case for Q1 2019, as both the number of funds closed and the total capital raised declined from Q4 2018. Appetite for the asset class remains strong, though, despite concerns about a potential market downturn: 219 funds raised a combined $100 billion in Q1, in line with the $95 billion secured in Q1 2018. Where figures differ, though, is the number of funds closed in each period, with 340 funds closed in Q1 2018. Capital is becoming more concentrated among a small number of large funds."