In March’s edition of Private Equity Spotlight, we look at investor appetite for private equity in the year ahead, including:

2016 Hedge Fund Letters:

  • Satisfaction with returns.
  • Target allocations for the year ahead.
  • Strategies and regions targeted.
  • Key issues cited by investors.

Venture Capital Fundraising

Also this month, we examine venture capital fundraising in 2016 by region and fund type, and look at the prospects for the strategy in 2017.

News

Our industry news round-up brings you the latest news from the venture capital industry, including first-time funds in market and recently closed venture capital funds.

Latest Trends and Statistics

  • Analysis of assets under management and dry powder.
  • Venture capital investors to watch.
  • An overview of venture capital fund managers.
  • Details of upcoming private equity conferences.

Investor Outlook For Private Equity In 2017

Using data from the recently released Preqin Investor Outlook: Alternative Assets, H1 2017, we take a look at investor appetite for private equity in the year ahead, including allocations, strategies and geographies targeted, key issues and more.

Satisfaction With Private Equity

Institutional investors surveyed by Preqin in December 2016 expressed a high level of satisfaction with private equity: 84% of investors reported a positive view of the asset class at present, up from 59% two years earlier (Fig. 1).

Ninety-five percent of investors reported that their private equity fund investments had met or exceeded expectations in 2016, including 24% for which they had exceeded expectations (Fig. 2). The 5% that felt that their investments had fallen short of expectations was the smallest proportion in the past six years.

In terms of longer-term performance, investors are even more positive: 40% reported that their private equity investments had exceeded expectations over the past three years, second only to private real estate (42%). Despite this, the proportion of investors that reported that their confidence in the ability of private equity to achieve portfolio objectives had fallen over the past year increased from 9% to 14% (Fig. 3), possibly due to concerns about whether fund managers can continue to deliver strong returns at a time of high valuations. Nevertheless, the vast majority (86%) of fund managers reported that their confidence in the ability of private equity to achieve portfolio objectives was unchanged or had increased over the past 12 months.

Private Equity & Venture Capital In 2017

Investor satisfaction with private equity is driving larger sums of capital to the asset class as investors look to maintain and increase their allocations. Over the longer term, almost half (48%) of respondents plan to increase their allocations to private equity, while a further 46% will maintain their allocations – these are some of the highest levels seen over the past six years (Fig. 4).

Investor Activity In 2017

Positive investor sentiment towards private equity is set to lead to further investment in the asset class in the year ahead, as 40% of investors plan to commit more capital to private equity funds in the next 12 months than they did over the past 12 months (Fig. 5). Although this represents a small decrease from 43% in December 2015, the proportion that plan to invest less capital over the next 12 months has also fallen over the same period, from 13% to 11%.

With 89% of investors looking to invest the same amount or more capital in private equity in the next year, over three-quarters (76%) plan to make their next commitment in Q1 2017 and 7% intend to do so in Q2 (Fig. 6). A further 11% plan to invest in the second half of the year, with only 6% expecting to wait until 2018 or later for their next commitment.

Investors are increasingly spreading their investment across a number of funds, with the proportion of investors that plan to commit to fi ve or more funds over the next 12 months increasing from 43% in the H2 2016 Investor Outlook to 51% at present (Fig. 7). Similarly, the proportion that intend to make just one or two investments has fallen from 34% to 26% over the same period.

However, despite investing across a larger number of vehicles, for the majority of investors, the intended capital commitment to the asset class remains small: 52% of investors plan to invest less than $50mn in private equity over the next 12 months (Fig. 8). Nevertheless, a small but important group of investors will be making large commitments over the coming year: 13% of investors plan to invest $500mn or more in the asset class.

Private Equity & Venture Capital In 2017

Strategies And Geographies Targeted

As investors seek to commit greater sums of capital to private equity over the coming year, they continue to identify small to mid-market buyout funds as the most attractive fund type, with 58% of investors believing they present the best opportunities (Fig. 9). This is up from 50% in the H2 2016 Investor Outlook, but remains below the figure for H1 2016 (61%). Venture capital followed, cited by 28% of respondents, although this has fallen from 36% in June 2016, possibly due to investor concerns about overinflated prices for venture capital companies and their potential impact on future returns.

North America is considered the most promising region for private equity investment: 61% of investors believe it presents the best opportunities at present, followed by Europe (44%, Fig. 10). In terms of allocations, however, a greater proportion of LPs plan to increase their allocation to Europe (31%) than North America (25%) over the coming year, with 4% and 7% planning to reduce their allocations to these regions respectively (Fig. 11).

Outside the established private equity markets of North America and Europe, 21% of investors saw Asia as among the most favourable regions for private equity investment. Eighteen percent of investors plan to increase their allocation to the region over the coming year, compared with only 5% that plan to decrease it.

Emerging markets and the Rest of World region were seen as offering the best opportunities by 19% and 7% of investors respectively. According to investors currently active in emerging markets, the most promising countries/regions are Emerging Asia (41%), China (39%) and India (20%, Fig. 12).

Private Equity & Venture Capital In 2017

Key Issues

While investor sentiment towards private equity is positive, there remain a number of challenges facing investors in the asset class. High valuations for portfolio companies remain the number one concern, cited by 70% of respondents (Fig. 13). Combined with record levels of dry powder and stiff competition for assets, investors are increasingly concerned about the impact high pricing will have on returns in future.

With valuations high, the exit environment has also become a key issue for the industry, with investors concerned that it may become more difficult for fund managers to realize their investments at current valuations. The proportion of investors citing the exit environment as a concern increased to 51% from 24% the previous year.

Deal fl ow was also cited by 41% of investors, up from 34% in December 2015. Forty-five percent of investors reported that it has become harder to find attractive investment opportunities over the past year, compared with only 5% that are finding it easier (Fig. 14).

In terms of broader macroeconomic

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