Private equity (PE) has fallen a long way since its pre-recession boom, and unlike other sectors it has yet to see any clear signs of recovery. SEI Investment Management Services recently surveyed private equity managers and investors, and the company found a challenging market with more capital than opportunity, and too few exit opportunities for investors looking to cash out.
Reason to allocate money in PE Fund
“A trillion dollars of dry powder is leading to more competitive bidding situations, raising the price expectations of sellers, and making fundraising more difficult,” says the report. With $3.3 trillion in total assets globally, that means almost a third of the money is actually uncalled commitments. With so much money looking for a home, sellers are able to demand top dollar. “Cheap capital and rising public equity markets are pushing valuations higher, making it more difficult to justify new investments. At 9.0x to 9.5x, EBITDA multiples are closing in on levels last seen in 2007.”
In his first-quarter letter to investors of Greenlight Capital, David Einhorn lashed out at regulators. He claimed that the market is "fractured and possibly in the process of breaking completely." Q1 2021 hedge fund letters, conferences and more Einhorn claimed that many market participants and policymakers have effectively succeeded in "defunding the regulators." He pointed Read More
That might be fine for other types of investment, but 59.6 percent of investors said that return potential was the main reason for them to allocate money to PE funds in the first place. Finding high-quality investment opportunities was listed as the most significant challenge by institutional investors, consultants, and managers.
Investments in private sectors
But what’s really interesting is that people aren’t really shying away from PE as an investment strategy. Among surveyed investors, 36 percent planned on increasing their allocation to private equity over the next year, and only 9 percent intend to decrease. Among consultants, nearly half intend to increase their allocation and none indicated that they would pull money out of PE.
So even when everyone agrees that PE is suffering from a glut of investment that outstrips solid investment opportunities and forces everyone to accept weak deals, people want to put even more money into the system. The only rational explanation is that there aren’t any better options, and that may well be the case. Oaktree Capital Group LLC (NYSE:OAK) CEO Howard Marks recently said, “Nothing is compellingly cheap,” and Richard Bernstein CEO James Montier has said that there’s almost nothing to invest in besides cash.