Allocations to hedge funds are likely to increase, while higher-risk venture capital and private equity allocations are likely to suffer
Today Preqin, the global leader in alternative assets data, tools, and insights, has published its H2 2022 Investor Outlook report. The exclusive survey hears from more than 300 LPs, interviewed in June 2022, investing across alternative assets — breaking down global investor sentiment in the following categories: ESG, private equity, venture capital, private debt, hedge funds, real estate, infrastructure, and natural resources.
Q2 2022 hedge fund letters, conferences and more
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Economic Concerns Spook Investors
Preqin’s Outlook found that investors expect private equity and venture capital near-term performance to face the strongest headwinds, with 50% and 55% of survey respondents expecting worse performance over the next 12 months, respectively. Venture capital valuations are of most concern, with 80% of investors viewing the asset class as overvalued. As markets come under pressure, the highest risk asset classes such as private equity and venture capital are expected to be impacted the most. The recent summer rally in stock markets may provide some relief, but it remains to be seen if it constitutes a structural change in direction.
Concerns over deteriorating economic conditions are counterbalanced by optimism that we are reaching a bottom low point in the equity market. Preqin analysts found that 55% of survey respondents believe that we are reaching this stage of the market cycle in equities.
Only 30% of private equity and 26% of venture capital investors plan to increase the pace of capital deployment in the next 12 months. This represents, respectively, a 13 and 17 percentage point decline compared to the same survey last year. By contrast, 24% and 13% of investors plan lower commitments of capital – with the remainder looking maintain their current pace of investment. Investors are now firmly in risk-off mode. According to the Q2 2022 survey responses, allocations to hedge funds are likely to increase, while higher-risk venture capital and private equity allocations are likely to suffer. In particular, we expect macro, CTAs and relative value hedge funds to attract more flows. This is consistent with our expectations of a softer fundraising environment for private equity and venture capital (PEVC) in the second half of the year.
Developed Market Allocations Provide Safe Betting
The share of investors planning developed market allocations only was 52.8% for private debt, 40.8% for venture capital, and 34.8% for private equity. This represented a 15.2 percentage-point, 16.3 percentage-point, and 6.6 percentage-point increase compared with June 2021, respectively.
The strong dollar poses a significant risk to the global economy. Emerging market assets have traditionally suffered during times when the dollar is strong, in part due to the additional strain that USD-denominated debt places on balance sheets.
Cameron Joyce, SVP, Deputy Head of Research Insights at Preqin, says: “Our latest investor survey indicates a material shift in investor behavior. The hangover from post-COVID-19 stimulus measures – combined with geopolitical events – has created the perfect storm for risk assets in 2022. In private markets, we have seen a relative shift in preferences towards real assets and away from higher-risk private equity and venture capital investments. Fresh allocations to alternative assets are likely to continue in the current environment but at a slower pace. That said, more defensive asset classes such as hedge funds and private debt are expected to fair comparatively well.”
Key Preqin Investor Outlook H2 2022 facts:
- Only 30% of private equity and 26% of venture capital investors plan to increase their pace of capital deployment into the asset class in the next 12 months.
- 50% of private equity and 55% of venture capital survey respondents expect worse performance over the next 12 months.
- A total of 55% of survey respondents believe that we may be approaching the bottom of the current equity market cycle, whereas 63% still expect a continued deterioration of the macroeconomic environment.
About Preqin
Preqin is the Home of AlternativesTM, the foremost provider of data, analysis, and insights to the alternatives industry.
