Private Equity & Venture Capital In 2016 by Preqin
CEO’s Foreword – Introducing Private Capital
January 2016 finds private equity in good shape. Like any successful industry it faces many issues – high valuations, increasing regulation, a crowded fundraising market, fee pressures – all of which are covered in more detail by my colleague Christopher Elvin, but the bottom line remains the same: private equity has delivered superior returns to its LPs, and most of them intend to increase their allocations to the asset class.
What I would like to focus on here is what precisely we mean by the phrase ‘private equity’ and how that is evolving.
The private capital industry has grown and changed immensely since Preqin first began tracking it in 2003. The diversity of fund strategies has grown as managers and LPs target new areas to generate alpha; sectors such as private debt, infrastructure and natural resources, all once considered subsets of private equity, have grown and evolved into discrete asset classes. Meanwhile, industry terminology has struggled to keep pace, and ‘private equity’ has come to have interpretations as varied as buyout funds specifically, or closed-end private funds generally.
From the beginning of 2016, Preqin will be updating its terminology to better reflect the growing diversity of the industry. Preqin reports and press releases will henceforth use the following terms:
- ‘Private Equity’ will refer to the core asset class centered on the buyout and venture capital industry, together with other closely related strategies.
- ‘Private Capital’ will refer to the broader spectrum of private closed-end funds, including private equity, private debt, private real estate, infrastructure and natural resources.
The table below indicates the fund types Preqin considers as constituting each asset class.
In this year’s 2016 Preqin Global Private Equity & Venture Capital Report you will find an overview of the entire ‘private capital’ universe, followed by a deep dive into the key developments and trends in each of the ‘private equity’ strategies. You can find a similar deep dive into private debt, real estate, infrastructure and natural resources in Preqin’s other annual reports.
The private capital industry continues to evolve rapidly, and Preqin strives to support investors, fund managers and their respective advisors with the best and most comprehensive information to help them make the best decisions and achieve their objectives. We are very grateful to our many customers for your support, feedback and suggestions and we are continuing to invest heavily in Preqin’s data and products to continue to serve you in 2016 and beyond.
Private Equity & Venture Capital in 2016
(AUM) now stand at $4.2tn as of June 2015 (latest data available) and the AUM of the core private equity strategies encompassing buyout, venture capital and other closely related strategies has expanded to $2.4tn of this total. This growth has been fuelled by another strong year for fundraising, a rise in dry powder levels and an increase in the unrealized value of portfolio assets. This growth, however, is not without its concerns; the fundraising market is more competitive than ever and dry powder levels continue to increase and put further stress on finding attractive entry prices for assets.
As a result of the record distribution levels seen in 2014, private equity fundraising in 2015 was robust, with 689 vehicles raising $288bn over the course of the year. While currently below 2014 levels, this number will increase as more data becomes available and it is likely that 2015 will be on a par with the total capital raised in 2014. The fundraising market is, however, more competitive than ever; there are currently 1,630 private equity funds on the road seeking $483bn. The gap is also widening between established fund managers and emerging managers; just 8% of the capital raised in 2015 was secured by new GPs and 54% of investors surveyed at the end of 2015 stated they would not consider investing in first-time funds over the next 12 months.
As confirmed by Preqin’s analysis of public pension fund returns, private equity continues to deliver superior returns compared to all other asset classes over the longer term. The trend of distributions significantly surpassing capital calls continued in 2015. As of June 2015 (the latest data available) $189bn was returned to investors compared with $117bn in capital calls, following on from 2014 when $475bn was distributed while only $294bn was called from LPs. This fl ow of capital back to LPs has unsurprisingly helped to drive investor appetite for the asset class, and the results of Preqin’s latest investor survey showed that 94% of the investors surveyed felt that the performance of their private equity portfolios had met or exceeded expectations, compared with just 6% of respondents that felt returns had fallen short of their expectations.
While the majority of LPs will be delighted with the returns they have received, many will now find themselves with more work to do in order to maintain their allocation. However, the strong performance of the asset class and positive investor outlook means more capital will continue to fl ow into the asset class.
Concern over pricing and the impact it may have on returns is clearly at the forefront of both fund managers’ and investors’ minds. The results of Preqin’s most recent LP and GP surveys showed that 70% of LPs and 40% of GPs surveyed believe valuations to be the biggest challenge facing the industry in 2016. However, the survey results also highlighted that fund managers in different regions perceive themselves to face different challenges. Unlike their North America- and Europebased counterparts, Asia- and Restof World-based fund managers, while
recognizing valuations as an important issue, in fact appear more concerned about fundraising.
There can now be no doubt that the venture capital market is in a boom period. Following on from a strong 2014, venture capital funds raised a further $47bn in capital, which included the
closing of the largest venture capital fund in history, the $3.4bn Insight Venture Partners IX. Venture capital funds also recorded the highest one-year horizon returns (20.5%) of any strategy and venture capital deal activity reached a record aggregate level with $136bn from 9,241 transactions. Investors have taken note of this turnaround in fortune and 36% of investors surveyed by Preqin at the end of 2015 were looking to invest in venture capital funds in 2016.
Outlook for 2016
The outlook is bright for private equity & venture capital in 2016, but the year will not be without its challenges. Fundraising should remain strong due to investor demand, but the challenge of identifying the best investment opportunities in a competitive market remains for LPs. GPs will be excited by the prospect of fundraising in the year ahead, given the liquidity within the investor community, but less established fund managers face a difficult task vying for investor capital and meeting the demands of an increasingly sophisticated community.
Preqin’s fund manager survey confirms that the majority of GPs are looking to deploy more capital in 2016 than they did in 2015 despite concern over valuations. The same market conditions that are making it challenging