Proportion Of Private Equity Investors Making Fund Commitments Falls Over Past Year by Preqin

Preqin’s latest analysis of investor activity in private equity has revealed a notable drop in the proportion of investors making fund commitments. During the first half of 2014, 62% of institutional investors globally surveyed by Preqin made investments in funds, but this proportion has fallen to 52% from Preqin’s most recent survey at the end of H1 2015. Investors may be holding back on new commitments given the record high levels of dry powder in the industry, which currently stands at $1.3tn.

Positive Outlook Despite Slowing Investor Activity

The first half of 2015 has seen a further increase in the levels of private equity dry powder available for fund managers to invest, with $965bn* in uncalled capital at the start of July 2015. With such large levels of unspent capital, fundraising and investor activity seems to have slowed slightly in H1 2015. LPs may be putting off investments while they wait for previously committed capital to be put to work. Despite this, attitudes towards the asset class remain positive, with the vast majority (87%) of investors reporting that their private equity investments have either met or exceeded expectations in the past year. In fact, only 11% of investors surveyed indicated they are looking to invest less capital in private equity compared to 12 months before, the smallest proportion across all asset classes.

This shows that LPs are still willing to commit significant amounts of capital to fund managers and it is therefore imperative fund managers know the attitudes of LPs in order to access this money. Preqin’s most recent survey of over 100 institutional investors in private equity provides fund managers that are looking to nurture new and existing LP relationships with valuable insight, capturing a wealth of information on investor sentiment and investment preferences.

According to Preqin’s latest survey, just 9% of private equity investors are looking to reduce the number of GP relationships they maintain in their portfolio over the next two years, compared with 14% six months ago. This will be welcome news to fund managers, as the statistic suggests that the LP community at large is not following the lead of CalPERS, the world’s largest institutional investor that was widely reported to be actively looking to cut its number of GP relationships. In terms of fund types, the majority of LPs still see small to mid-market buyouts as offering the best opportunities in private equity, with 50% of respondents looking to invest in this fund type in 2015. Notably, 23% of private equity investors see venture capital funds as presenting the best opportunities, followed by distressed private equity and mezzanine funds, which were viewed as presenting the best opportunities by 17% and 14% of private equity investors respectively.

First-time fund managers continue to be at a disadvantage when looking to secure capital, with 51% of LPs indicating that they would not commit to a debut fund managed by a new GP. Just under half (47%) of LPs deem the length of a GP’s track record as the most important factor to take into account when deciding whether to commit to a fund, highlighting that experience remains vital to a GP’s fundraising success.

Satisfaction with Returns

While the private equity asset class is renowned for its outperformance over public markets over the longer term, Preqin has aimed to gauge more specifically what margin is expected from investors, and how they feel their private equity investments have fared in the last year. Between 2013 and 2014, a notable period for bull market conditions with significant stock market highs, there was a decrease in the proportion of investors that expected their private equity portfolios to beat the public market by more than 2%. In June 2015, despite public market indices nearing record highs, the largest proportion of investors (49%) have indicated they expect their private equity investments to exceed public market returns by more than 4%. This would be driven by the apparent success of respondents’ private equity investments in the last 12 months.

Private Equity

Fig. 2.2 shows that over a third (35%) of respondents stated that their private equity fund investments had exceeded their expectations in the last year, which is a substantial increase on previous years. In recent times, the proportion of investors that had their expectations surpassed for their private equity portfolios has been declining, falling from 18% in June 2013 to 12% in June 2014. The proportion of LPs that felt their investments in the asset class had fallen short of expectations has remained relatively constant at 13%.

Private Equity

However, there is some notable disparity in satisfaction with returns between regions. According to Preqin’s survey, half of investors based in Europe had their expectations exceeded by the performance of their private equity fund investments over the past year, as shown in Fig. 2.3. But with 19% of Europe-based investors reporting that their private equity portfolio had fallen short of expectations, the region has the largest proportion of dissatisfied LPs.

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